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RyanH
New Member

Will I have to pay capital gains on parent's home now in my name?

Hi,

Several years ago my mother passed and our family lawyers recommended that my father transfer their home (now his) into my name.  He is in great heath, thankfully, but the idea was to protect the house should he need medical care in the future.

A quit claim was done, filed and while he has life use the house has been "mine" since. We were assured we had taken their biggest asset and kept it safe.  Since, while not making a huge public announcement, when this comes up friends or relatives who hear of it always rave about what a great move this was because they did the same and it saved them a fortune OR they know someone who should have and ended up having to sell off a home in the family for decades to pay medical expense, etc. for Medicare, etc and they all wished they had done what we did.

So, we felt confident all was wonderful.  However, I have read several articles online that make it sounds as if someday when my dad passes and I sell the probably I will have to pay huge capital gains because, on paper, I paid $1 for the house. Heck, my parents paid 1/20th of it's value 50 years ago for it so even if we used what they paid the "profits" are going to be huge.

Our goal here was to protect this for my siblings and myself. I would sell it off and split the proceeds among us. We are a very close family and there would be no chance others would not receive exactly what my parents wanted to the penny.

However, this legally is my second home.  Have we sheltered the house from Medicare which we may never need to worry about if dad doesn't need care yet exposed the house to massive capital gains someday when we no longer need it?  I'm getting worried.

Thanks!

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25 Replies
PennyJ
New Member

Will I have to pay capital gains on parent's home now in my name?

Hello RyanH,

Thanks for your question about capital gains taxes on your parents’ home.  First, let me apologize for the length of this answer, but I hope I have provided you with the information you need.

Based on the information you provided, you will be subject to capital gains tax on the home when you sell it.  However, the amount of gain may not be as much as you think. 

The taxable gain will be the sales price less your adjusted basis in the house.  The house is considered a gift to you from your father; therefore, your initial basis is the lesser of:

  •      the fair market value at the time of the gift
  •      the adjusted basis that your father had in the home at the time of the gift

It appears that the adjusted basis of your father would be the lesser amount, so let’s discuss the components of his basis.  If your parents owned the home as “tenants by the entirety” or “joint tenants with right of survivorship”; your father’s basis will include both his share of the basis and the basis inherited from your mother.  Therefore, his adjusted basis is composed of:

  •     50% of the original purchase price, plus 50% of improvements and other increases to basis, less 50% of decreases to basis (see image below)
  •     50% of the fair market value of the home on the date of your mother’s death
  •     Plus any increases or decreases in the basis after your mother death

Your basis would then be your father’s adjusted basis at the time of the gift.

I know this appears rather complicated, so let me provide an example.

Example:  Let’s assume that your parents paid $50,000 for the house.  Over the years, they made various improvements to the home that totaled $70,000 bringing the adjusted basis to $120,000.  (There were no other increases or decreases in basis as outlined in the image below.)  At your mother’s death, the fair market value of the home was $200,000.

Your father’s adjusted basis would now be $160,000, a total of:

  •      $60,000 (50% of purchase price plus improvements)
  •      $100,000 (50% of the fair market value at your mother’s death)

If your father made an additional improvement to the home of $10,000 before giving it to you, his adjusted basis would now be $170,000.

At the time of the gift, the fair market value of the home is $210,000.  Since his adjusted basis of $170,000 is less than the fair market value of $210,000, your basis in the home would be $170,000.

Your basis will be the starting point of determining the gain when you sell the home.  Any improvements you make will increase the basis.  The selling price less your adjusted basis will be the taxable gain. 

In addition, capital gains are currently taxed at a lower rate than regular income.  As tax laws change, this may or may not be true when you sell the home.

As far as the part of your question regarding the house being sheltered from Medicare, I am unable to address that.  I recommend that you consult with an attorney that specializes in Medicare issues if your have any questions.

I hope you find this answer helpful.  If you have additional questions or comments regarding this issue, please feel free to reply to this post for further clarification.

Thanks for trusting TurboTax with your tax preparation!

RyanH
New Member

Will I have to pay capital gains on parent's home now in my name?

Thank you for the detailed reply!  It is very helpful.

The house was held as "“joint tenants with right of survivorship” by my parents.  I just want to clarify how I (when the time comes) would prove the cost of improvements.  This is a home that was purchased in the late 1960's for $20,000.  Since that time basically every inch of the building has been updated.

Just in the last decade the house has received a new roof, new windows, new siding, new furnace, a major kitchen remodel, a second floor that was gutted to studs and remodeled, etc.    I can't imagine my father has receipts for what is easily tens of thousands of dollars in improvements.  In truth, very little of the house I actually was raised in remains untouched. We estimate the house to now be worth over $200,000.  The value has not changed much due to the market since it was transferred to me and all improvements were completed before my mom's passing.

Must I prove the costs put into the house in improvements?  I truly would not know where to begin even now having him assemble documents. Fair market value I can determine, it's proof of the costs of the countless improvements that were made before it was gifted to me.

Thanks again!
PennyJ
New Member

Will I have to pay capital gains on parent's home now in my name?

Hi RyanH,
I understand the difficulty of proving the costs of improvements.  Of course, any documentation would be helpful, but few people would have saved receipts for that many years.  I recommend that you work with your father to develop a list of the improvements with approximate dates and estimated costs.  This will go a long way to providing a logical explanation for how you determined the basis when you eventually sell the home.
Having concrete proof of the basis is not necessary when you must report the sale of the home.  But in the unlikely event you are audited, the more information you have the better.the outcome.
Hope this helps!
pod1000
New Member

Will I have to pay capital gains on parent's home now in my name?

Am in a similar situation.  Have no idea what the home originally cost or how much improvements cost.  Don't know what to do since we have no proof of how much the house improvements cost, plus sale proceeds received must be split with another sibling
bg01
New Member

Will I have to pay capital gains on parent's home now in my name?

It appears this house may have been deeded as a Life Estate. The question reads in part ..."A quit claim was done, filed and while he has life use the house has been "mine" since..." The statement "he has life use" is what caught my eye.

If that is true, then I believe the capital gains owed will have a cost basis of the homes Fair market Value as of the date of the fathers death minus any improvements made to prepare it for sale.

Will I have to pay capital gains on parent's home now in my name?

That is correct.
RyanH
New Member

Will I have to pay capital gains on parent's home now in my name?

THANK YOU SO MUCH!  I know posted this question long ago however your "life use" comment does change alot. Yes, the house title has my name on it and under my father's name with "Life Use" clearly stated.  It was something I insisted on as I would NEVER dream of asking my father to leave the home my parents worked so hard to pay for and we were moving it to my name for estate purposes.

So while he is still healthy as can be (and we'll be 5 years after the title change next summer) it is very valuable to know that capital gains would be paid on the difference of the value of the house upon his eventual passing and the sale price. When my parents paid under $20k for the home one begins to wonder how this effects the family down the line.

Will I have to pay capital gains on parent's home now in my name?

However, just be aware that is the house is sold before his death (such as if he goes to a nursing home), it could be a bit more tricky, so try to avoid that if possible.
Lennyz
New Member

Will I have to pay capital gains on parent's home now in my name?

How do I find the fair market value of my mother’s home in the past?

DianeC958
Expert Alumni

Will I have to pay capital gains on parent's home now in my name?

To find the fair market value for your mother's home, real estate agents can help with that.  The value you need is the amount the home would possibly sell for as of her date of death.

 

Link to IRS web site about reporting Gifts & Inheritances

 

@Lennyz

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Lennyz
New Member

Will I have to pay capital gains on parent's home now in my name?

Is there a worksheet for this basis calculation?  It’s somewhat complicated 

AnnetteB6
Employee Tax Expert

Will I have to pay capital gains on parent's home now in my name?

IRS Publication 523 contains a worksheet that will help you go through the many different items that can affect the basis of a home.  

 

Here is a link to the PDF version.  The worksheet starts on page 12.  IRS Publication 523

 

@Lennyz

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mtkoone
New Member

Will I have to pay capital gains on parent's home now in my name?

My brother and I recently sold my parents home.  It was deeded into our name back in 2008.  We had a living will that my dad would live there as long as he wanted.  We lost our mother back in January 2017 and Dad decided that he wanted us to sell the house.   We did sell it March 30,2020 and he gave the money to my brother and  I to be split equally.  

The house was purchased back in 1976 for 20,000 and we sold it for 100,000.00... We have improvements on the home for 34,700.00

Do we have to pay capital gains on the house and also does the capital gains have to be paid within the first quarter of receiving this money?

LeonardS
Expert Alumni

Will I have to pay capital gains on parent's home now in my name?

You and your brother became owners of the house when the deed was put in your names in 2008.  In order to qualify for the capital gains exclusion the home would have to have been your primary home for 2 out of the past 5 years.  If you do not meet this test then you are unable to exclude any capital gains from the sale of the house.

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