My mother put my name on her house deed before her death. After she passed I sold the house. Do I owe any Capital Gains tax?

[Opus 17]

@Pa8 

In general, the IRS view of joint tenancy is that you were not actually given anything of value when your mother placed your names on the deed, because you could not sell or otherwise dispose of the property while she was alive without her permission.  In that case, you inherited the property with a stepped up cost basis equal to the fair market value on the day she died.

Then, you increase the cost basis by the cost of any permanent improvements that you have made, and you decrease the cost basis by depreciation that you took or could have taken while the property was a rental. If audited, you will need proof of the cost of your improvements and you will need proof of your depreciation. This should be contained in your tax returns when you filed schedule E to report the rental income.

When you sell the property, you will owe capital gains tax on the difference between the selling price and the adjusted cost basis.

It would be a good idea to have the situation reviewed by an enrolled agent, which is an accountant who is specially admitted to practice before the IRS.  If you haven’t been reporting your rental income, or you haven’t kept track of depreciation or you didn’t take depreciation, then professional assistance is required, to make sure that you pay the least tax necessary. Remember that if audited, the IRS does not have to award you any cost basis that you can’t prove, and if you can’t prove your basis, the IRS can assess is zero basis and determine the entire proceeds are taxable.

[tagteam]

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@Opus 17 wrote:

In general, the IRS view of joint tenancy is that you were not actually given anything of value when your mother placed your names on the deed, because you could not sell or otherwise dispose of the property while she was alive without her permission.  

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That is simply not true, in general or otherwise. The only issue would be the actual value of the interest, which would be dependent upon state law.

See Treas. Reg. §25.2511-1

A joint tenant can sell, or otherwise dispose of, that joint tenant's interest in the property; consent from the other owner(s) is not needed (although doing so will sever the joint tenancy).

A tenancy by the entirety cannot be severed without the consent of both parties (and a TBE is not available in all states and is only available to married couples in states where it is permitted).

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@Opus 17 wrote:

......you inherited the property with a stepped up cost basis equal to the fair market value on the day she died.

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A joint tenant does not "inherit" property held in joint tenancy with rights of survivorship. The interest passes to the surviving joint tenant by operation of law (i.e., it passes outside a will, if any; probate is not required).

The step up in basis would only be applicable to the interest acquired from the deceased joint tenant, not the interests of all joint tenants.

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@Opus 17 wrote:

It would be a good idea to have the situation reviewed by an enrolled agent, which is an accountant who is specially admitted to practice before the IRS. 

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An enrolled agent does not have to be an accountant. In fact, the IRS has no educational requirements in order to become an enrolled agent. From all appearances, an enrolled agent does not even need to be a high school graduate. The IRS only requires that applicants obtain a PTIN and pass a test.

It amazes me that one post can contain so many inaccuracies.

[trictoc]

As a temporary measure, my mother quit claimed her home to my brother and I once her dementia was diagnosed in 2012.  Soon after, she was moved to assisted living and died of Alzheimer's in 2015.  Her friend rented her condo until recently and the rent was used to offset her care for those years, so we did not claim it.  We're in the process of selling the condo this spring and wonder how we can offset capital gains tax since it truly was our only inheritance and the only asset in my mother's estate.  thanks for your input!

[Carl]

since it truly was our only inheritance and the only asset in my mother's estate.

If your mother did the standard quit claim deed making you owner of the house, this is not an inheritance. It's a gift. That matters. With in inheritance you get a step-up in the cost basis of the property on the date the original owner passed. Unfortunately, this is not your case.

When a property is gifted to you, you are also gifted the original cost basis plus the cost of any property improvements. If the gift given in any one tax year is valued at more than $15,000 then the giver (not the recipient) is required to report the gift to the IRS on IRS Form 709-Gift Tax Return.

Now don't let the name of that form mislead you. So long as the value of the gift does not exceed $11.6M then no taxes are assessed. While I'm certain the house cost basis was more than $15K, I'm also just as certain it was not worth more than $11.6M.  So while a gift tax return is required, there will be no taxes assessed to the giver since it was less than $11.6M.

So the form 709 needs to be filed to report the gift, since it was transferred before she passed and therefore is no a part of her estate at the time of her passing.

If you sell the property, you will owe taxes on any gain realized over the established cost basis of the property.

If you rented the property in 2021, then all rental income, expenses and depreciation are reported on SCH E. If the property was converted to a rental and then sold in the same tax year, you are not required to depreciate it.

Not sure on this, but since the property was gifted, if you owned the property less than a year then you "might" be taxed on any gain at the short term capital gains rate.

There are others in this form who will see this thread and will provide you more detailed information that I can.

[Opus 17]

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@trictoc wrote:

As a temporary measure, my mother quit claimed her home to my brother and I once her dementia was diagnosed in 2012.  Soon after, she was moved to assisted living and died of Alzheimer's in 2015.  Her friend rented her condo until recently and the rent was used to offset her care for those years, so we did not claim it.  We're in the process of selling the condo this spring and wonder how we can offset capital gains tax since it truly was our only inheritance and the only asset in my mother's estate.  thanks for your input!

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With all due respect, and my mom and dad were in the same situation...

You did it wrong.  There were better ways to transfer the home while protecting the asset value and minimizing your tax burden.  The paperwork matters, and what is in writing will control how this is handled, not what was in your mind.

1. The home was gifted to you in 2012.  Your mother is likely required to file a gift tax return for tax year 2012 to report the gift.

2. You and your brother were the owners since 2012.  From the time the home was rented, you were responsible to report the rental income on your tax returns on schedule E.  You might not have had a taxable profit, once depreciation and expenses were taken into account, but you were obligated to report the rental income.

3. When you sell the home, your capital gains will be determined by your cost basis, reduced by the depreciation you could have taken while the home was a rental, even if you didn't actually claim depreciation.

Your cost basis starts out in 2012 with your mother's cost basis, split equally between you and your brother.  Your mother's cost basis is whatever she paid for the home plus any permanent improvements made before 2012.  If she co-owned the home with a spouse, she may have a partial stepped up basis based on the market value when the spouse died, and what state they lived in.

Then you can further increase your own cost basis by the cost of permanent improvements made since 2012, but you must reduce your basis by depreciation you claimed or could have claimed when the home was rented out.  

4. I suggest you seek a professional accountant, preferably an enrolled agent.  You have up to 10 years of tax returns that may need to be amended, and a professional can help you assess the cost basis of the home and whether there is anything you can do to improve your situation. 

[tagteam]

Retained or reserved life estates are referred to in Treas. Reg. §20.2036-1(c).

See https://www.law.cornell.edu/cfr/text/26/20.2036-1

Note that a life estate can be implied from the circumstances of the transfer. If that was the case here (an implied life estate, which certainly appears to be a reasonable conclusion), then the property would have a stepped-up basis in the hands of a remainderman.

Regardless, I would also highly recommend consulting with local legal counsel and/or a local tax professional.

@trictoc