My father and I acquired a property with joint tenants title. He furnished 90% of the total cost. He passed away how much the basis of the house can step up?

[soultax09]

JT presumed to be 50/50 interest unless specified in the deed so 1/2 gets a stepped up basis.

[Anonymous]

I was told in the non-spousal JT property, the step up basis depends on how much each owner contributed to the total purchase cost.  E.g., if one owner paid 90% of the total cost, when he passed away the basis stepped up 90%.  Is that right?

[Anonymous]

I agree with soultax09 that JT means a 50/50 split so 50% gets stepped up.  in addition, since dad paid for 90% but only ended up with 50%,he made a gift to you that should be(en) reported on a gift tax return.  say price was $100 he paid $90 but ended up with $50 so the gift is $40.   if the purchase was in 2019, then no return is required if the gift was less than $15,000.  the executor would need to file.   the gift to you doesn't get stepped up.  

what if the purchase was a long time ago and a return wasn't filed.  i'm guessing that the IRS would do nothing as long as no tax was due.

you are free to consult with an attorney to see if we're missing something

[TomD8 · Accepted solution]

According to IRS Publication 551, page 10, @Anonymous is correct.  If the property was held as JTWROS and deceased father contributed 90% of the purchase price, 90% of its FMV at his death is includible in his estate, and is eligible for step-up in cost basis.

JTWROS with  a spouse is considered a "qualified joint interest" and the FMV at a spouse's death is split 50/50 regardless of contribution.

https://www.irs.gov/pub/irs-pdf/p551.pdf

[soultax09]

Read Pub 551 page 10 and agree with TomD8....but the IRS makes no sense....what's the difference if the father and son buy property held as jtwros and father pays 90% at closing and son pays 10% at closing ****OR**** father gives son cash right before closing and father and son each pay 50% at closing? Results should be the same but they're not according to the IRS.

[Anonymous]

Thanks for your guidance I read the article which is very helpful.  I also have related questions as follows.

We recorded the grant deed with JTWROS title when the escrow was closed.  Since the furnished ratio to the property is 90% to 10%,

Q1:  is there any gift tax issue?

Q2:  what documents needed to show IRS for the furnished ratio?

 Thanks 

[soultax09]

I'd show cancelled checks and stuff like that....could be wire transfers or receipts in the closing docs and the like.

The gift tax thing is a gift tax return because no gift tax would be owed if your father was under the $11,400,000 exclusion amount and if over you should get a lawyer anyway.....but I don't know how there would be a gift after reading Pub 551 because a completed gift would be removed from the estate.....looks like Pub 551 says it's not removed from the estate but sort of inherited by the joint tenant with a step up in basis according to the percentage contributed by the deceased.

[TomD8]

@Anonymous :There is no gift or gift tax involved.  A property share acquired by death of a joint tenant is not a gift.

@soultax09 :  <<what's the difference if the father and son buy property held as jtwros and father pays 90% at closing and son pays 10% at closing ****OR**** father gives son cash right before closing and father and son each pay 50% at closing? Results should be the same but they're not according to the IRS. >>

It might make a very big difference when son sells the property.  If the split were 50/50, only 50% of the cost basis would be stepped up to the FMV at death; if the split is 90/10, 90% of the cost basis is stepped up.  The higher the cost basis, the lower the capital gain tax the son will have to pay at sale.

[soultax09]

@TomD8: <<It might make a very big difference when son sells the property.  If the split were 50/50, only 50% of the cost basis would be stepped up to the FMV at death; if the split is 90/10, 90% of the cost basis is stepped up.  The higher the cost basis, the lower the capital gain tax the son will have to pay at sale.>>

That wasn't my point and I get what you are saying....higher basis is better for the son.....but where the father gives cash to the son first and then the son immediately uses the cash to pay his full share of the 50% a gift tax return needs to be filed.....where the father does ***NOT*** give the son cash first but pays 90% of the cost at closing a gift tax return does ***NOT*** need to be filed because there is no gift according to the IRS.....does that make sense to you? It doesn't to me.

[TomD8]

@soultax09 :  I don't think the IRS would regard either circumstance as a gift, because in each case father receives something of value in return for his money: partial ownership of the house.

If father gave money to the son to purchase a home in which the father took no ownership interest, THAT would be a gift.

[soultax09]

@TomD8: Okay here's an example:

House costs $100,000.....father pays $90,000 at closing son pays $10,000 at closing...father furnishes 90% of the cost....no gift and the house is in father's estate stepped up to fmv at death per the IRS.

***OR*** House costs $100,000....father gives son $40,000 in cash.....father then pays $50,000 at closing and son pays $50,000 at closing....gift tax return needs to be filed for the $40,000 in cash father gave son and there is no step up in basis for that $40,000 father first gave son to get the percentage of ownership down from 90% to 50%.

So when father pays the 90% at closing why isn't the difference between what the son paid and the father paid a gift? State law says father and son each own 50% as jtwros, not 90/10 if they went to court. ?????

[Anonymous]

The deceased owner’s step up value will be put in the estate tax.  E.g., the purchase value was $100G and the FMV at the death was 200G.  For 90/10 ratio 180G will be claimed in estate tax (skip the exemption here).  

If F gave S 40G as a gift and claimed the gift tax.  At the death only 100G was claimed in the the estate tax.  From IRS perspective, he/she doesn’t lose anything.

[soultax09]

@Anonymous I ***get*** that....I'm saying something different which is that the IRS treats JT differently than state law.

Per state law, each joint tenant owns an ***equal*** undivided interest in the property.....if there are 2 JTs each owns an undivided 1/2 interest....if there are 4 JTs each owns an undivided 1/4 interest.....that's NOT arguable.

Point is the IRS looks at how much each JT contributed and that's contrary to state law where it makes no difference....one JT could contribute $90,000 while the other contributes $10,000 and the state still treats them as owning an undivided 1/2 interest....if either JT sued for partition and the court ordered a sale each would get 1/2 of the sales proceeds and it doesn't matter that one contributed more absent fraud or something like that.

If the IRS treated JT like the states, then if there were 2 JTs where one contributed more than 50% the excess above 50% would be treated as a gift to the other JT.

[Carl]

Unless you have the means to prove otherwise (and I assume you do) then the split is 50/50. Otherwise if you can prove it, then it's 90/10. Also understand that just because one owner contributed 90%, does not always mean they own 90%. So don't be surprised if challenged by the IRS on your 90/10 claim.

There is no gift tax. Your deceased father did not in any way, form or fashion "give" you his share. With a JTWROS ownership, you "automatically" inherited his share and the inheritance was outside of any last will and testament he may have left.

Your step-up in cost basis will be the appropriate percentage of the FMV on the date of his passing, and "NOT" the date you acquired full ownership of the property.

You should be receiving a K-1 from his 1041 Estate return showing the inheritance passing of his ownership to you. There should be no need to enter the K-1 in your tax return, but there "could" be. So if unsure, just ask once you receive the K-1 and can see what all is on it. (For example, if you inherit a tax-deferred retirement account, it "could" be taxable to you, depending on how you handle it.)