Cost Basis

[Drkbest]

My father placed my brother and myself on a deed in 2013 he bought the house 1968 for 21400. We just sold it this December. Is the cost basis from date of original purchase or when we were added to the deed as joint tenants? 

thanks for your help.

k

[Opus 17]

Has your father passed?  If yes, you might have received a stepped up basis, but it depends on exactly how the deed was worded.  Do you know?  You might need to discuss with an attorney. 

[Drkbest]

Yes, he passed July 2023, we sold it as joint tenants. 

[Opus 17]

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@Drkbest wrote:

Yes, he passed July 2023, we sold it as joint tenants. 

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If your father retained a life estate, meaning he had the right to live there until he died, then you received the property with a stepped up cost basis equal to the fair market value on the date he died.  So you likely have little to no actual capital gain.

Even if the life estate is not written into the deed, it might be implied by the overall facts and circumstances (such as, you and your father agreed he would live there until he died and that was your intention even if it wasn't written down).  However, if audited, it can sometimes be more difficult to prove an implied life estate because it wasn't written down.  

You might want to take the original deed to a tax accountant or attorney for a professional opinion. 

If there was no life estate at all, then your basis is 1/3 the price he originally paid in 1968 (because he gave each brother 1/3 of the house if there were three names on the new deed), plus each brother inherited 1/6 the house (half the father's remaining 1/3 share) when he passed, getting a stepped up basis on that 1/6 share.

[Drkbest]

Thank you so much for your response. 

There was no life estate, just my brother, myself, and my step mother and my dad on the deed. 

However, he was living in her home when he died. The home was just sitting there deteriorating. 

Nonetheless, it sold for $315000. 

My assumption is my brother and i have a cost basis from 1968, though he added us in 2013. we have added up all permanent upgrades to reduce the tax burden. 

[Opus 17]

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@Drkbest wrote:

Thank you so much for your response. 

There was no life estate, just my brother, myself, and my step mother and my dad on the deed. 

However, he was living in her home when he died. The home was just sitting there deteriorating. 

Nonetheless, it sold for $315000. 

My assumption is my brother and i have a cost basis from 1968, though he added us in 2013. we have added up all permanent upgrades to reduce the tax burden. 

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There's no reason not to claim the highest basis you can prove.  If your father co-owned the property with his wife, and she passed before he did, that also raises your cost basis, because all three remaining owners would have gotten a partial stepped up basis when she died.

You should really see an accountant.  The difference between the weakest position (each brother's basis is 1/4 of $21,400) and your strongest position (each brother's basis is half of $315,000) represents a tax savings of as much as $22,000.  

[Drkbest]

Thank you again, my stepmother is still alive. So the proceeds of the $315000 was split between the 3 of us. 

I just don't understand why we cant start the clock in 2013 when she and my father married and he put us all on it as joint tennants vs 1968. Most every one  I have talked to is saying it is indeed 1968 for my brother and I. 

[Drkbest]

I was hoping Turbo Tax would make this more clear. 

[Opus 17]

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@Drkbest wrote:

Thank you again, my stepmother is still alive. So the proceeds of the $315000 was split between the 3 of us. 

I just don't understand why we cant start the clock in 2013 when she and my father married and he put us all on it as joint tennants vs 1968. Most every one  I have talked to is saying it is indeed 1968 for my brother and I. 

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Because that's not how cost basis works.  Cost basis is, roughly speaking, the amount of already-taxed funds you have invested in something.  When you are given a gift, you are also given the cost basis of the gift.  When you inherit property, you get a stepped up basis, but not when you are gifted property.  You can read publication 551 for a long discussion of basis of assets.

https://www.irs.gov/forms-pubs/about-publication-551

Now you are adding more facts.  Life estate is out the window since you sold the home with your stepmom and split the proceeds.

You start by determining your father's cost basis on the date before the gift (the date you were added to the deed).  The cost basis was the price he paid in 1968, plus the cost of any permanent improvements made between 1968 and 2013.  Repairs and maintenance don't count.  Whatever that cost basis was in 2013, you and your brother each get 1/4 of it since you were 1/4 owners.

Then, you can add 1/4 of the cost of any permanent improvements made between 2013 and 2023.  That is the new adjusted cost basis of each of the 4 co-owners on the day before your father died.

When your father died, each of the remaining 3 co-owners inherited 1/3 of his 1/4 share of the home, at a stepped up value equal to the fair market value on the date he died.  Assuming that the fair market value was $315,000, your father's share was $78,750, so each of the remaining 3 co-owners adds $26,250 to the previously calculated basis.  

That is your new adjusted cost basis.  From the selling price, you can subtract the real estate commission and maybe certain taxes and fees, as described in publication 523.  After adjustments, divide the selling price 3 ways, subtract your adjusted basis, and that is your taxable gain.

Remember that it is the selling price that counts, not the proceeds.  If the proceeds were reduced because there was a mortgage or equity loan to pay off, your gain is still calculated on the selling price.  

[Mike9241]

you did not originally mention your stepmother was on the deed or whether she was legally married to your dad. So one other point, if they lived in a community property state, the gain for your stepmother might be different than your and your brother's gain. Even if this was a common law marriage state laws may affect stepmom's reporting.  In either case, since state laws vary widely, see a lawyer. 

[Drkbest]

Hi again, 

Thank you so much for your time again.

Yes my father married her in 2013. So, I understand her cost basis will be different from my brother and I. 

I am working on finding the fair market value of the house in 2013. I just have to figure out the math or respond to the questions with whole numbers or just the 1/4 or 1/3 portion that is mine. 

thank you again. 

katherine