My father-in-law (FIL) died in 2015. My mother-in-law (MIL) is still living and has severe dementia but remains living in their home with aides and receives nothing but social security. Other than filing an IRS form to show his death, MIL hasn't filed ANY paperwork to clear FIL from anything. Though he died with a will, everything reverted to her and in her belief, that-was-that so there has been no probate.
In 2018 while trying to file a transfer on death, the deed was found to have a legal description error. Three of the four people that had signed at the purchase are dead so a quit claim deed assigning the property to my husband was the only means of clearing the title. There is no mortgage, MIL continues to pay the taxes and MIL has a lifetime estate. When she dies husband is selling the house. There is a more than double increase in the property value.
1) Upon future sale, is this a correction to the deed or a capital gains or a gift?
2) Since MIL didn't file any forms in 2018, are we required to go back and correct something for 2018?
3) Would it help if he lived in the home for two years before putting it up for sale to use an exclusion?
4) If it is a correction, do we put anything on our 1040 form or ignore quitclaim and use her date of death as basis?
You need real legal advice and tax advice, not random strangers on the internet.
As regards your husband's tax situation, it is very important to know the exact form of the deed. If his mother has a life estate and your husband is a "remainder man", that means your husband can't sell the home as long as your MIL is alive. In that case, the IRS view is that he was not given anything of value and will inherit the full value of the home with a stepped-up cost basis when she dies.
If the deed was "in fee simple" and he is the owner without restriction, then his cost basis, whenever he sells, will be his mother's cost basis, and he will owe capital gains tax on the gain, unless he lives in the home as his main home for two years before selling it. (And it needs to be his real main home, not just someplace he changes his mailing address to while still living with you and the rest of the family.)
There are other types of deeds, those two are the easiest to explain. You would need to review the deed language and consult a tax specialist.
If he is the owner of the home, he needs to document his cost basis, which is his mother's adjusted cost basis. That will depend not only on the original purchase price, but also the fair market value on the date his father passed away, plus the cost of any permanent improvements. A real estate appraiser can document the 2015 value. If the home is in a community property state, the mother's cost basis was stepped up when her spouse died and is equal to the FMV on the date he died. If not in a community property state, half the mother's cost basis was stepped up and half is her original basis (plus any adjustments for improvements). Your husband needs to diligently establish each part of the cost basis and save the documents for as long as he owns the house plus 6 years after he sells. The more cost basis adjustments you can prove, the less the capital gains.
I also strongly suggest you see an elder law attorney, who can advise on the tax, financial and legal implications of this situation. If your mother-in-law requires full time residential care (covered by Medicaid) the home transfer in 2018 might be seen as a gift that results in penalties and problems with Medicaid. (There is a 5 year clawback on large gifts.)
1. Whatever the reason, your spouse now owns the home, and will be responsible for capital gains when he sells. The question is how much gain, which depends on the basis, which depends on the type of deed, the state where the house is located, and other factors I described above.
2. A tax return is required if there is taxable income more than the standard deduction. If there was not enough taxable income to require a return, a return did not need to be filed.
3. If your spouse moved into the home for 2 years after his mother dies, he would qualify for the exclusion of $250,000. It has to be his main home, he really has to live there, not just for show. If he uses the exclusion in this way, then he would not be able to use the exclusion again if you wanted to sell your combined home for at least 2 years after using it for the sale of his mother's home. You would have to decide if the 2 year disruption is worth the amount you would save, which depends on the amount of gain, which goes back to the deed, the basis, and so on.
4. You don't have anything to report on a 1040 until you (your husband) sells the home. Then it is reported as a capital transaction. How much gains tax you pay, if any, depends on the factors discussed above.
Also note that for 2020, if your mother in law did not receive the round 1 and round 2 economic stimulus payments ($1200 and $600), a tax return could be filed in her name to claim a rebate in the amount of the missing stimulus, even though she has no taxable income. To file a return in her name, someone would have to have a power of attorney, or be appointed by a court as her legal representative. The same thing is true for the 2021 stimulus of $1400, if she did not get a check or a deposit into her bank account, it could be claimed on a 2021 tax return.
It would not be necessary to "catch up" by filing 2018 and 2019 returns in order to file a 2020 return.
@AinSeattle You need a lawyer that specializes in elder law and guardianship and also estate planning experience wouldn't hurt. The FIRST problem is if your MIL had severe dementia and there was no POA then the conveyance of the property wasn't valid. Get an attorney.
I see that you say your mother in law has a life estate (I missed this the first time through). If this is correct, and if the 2018 transfer was correct (either your mother in law was competent at the time or there was an appropriate power of attorney or other arrangement) then your husband will receive a stepped-up basis on the death of his mother and any taxable capital gains would only be on the difference between the selling price and the fair market value on the day she died (which is likely to be minimal).
However, a review of the entire situation by an elder law specialist is still advised, for several reasons including Medicaid protection.
Thanks for the responses. They have been helpful.
FWIW, I'm a trust but verify and re-verify type of person. This advice gives me a beginning place -- this is not the end.
There is a lot more details but to keep this short:
There is/was a POA.
No Medicaid considerations.
The residency requirements are covered.
Thanks again as my biggest concern was how to deal with the IRS -- hence turning to the TTax community.
Only my response answers were kept simple. The situation remains complicated as does the fact that MIL lives in a very rural area a few miles from the state line and most services come from a different state than her residency.
FWIW, prior to my posting the questions, I had paid for consultations with 3 of the 4 attorneys in the local area. The fourth I didn't contact because they are known as a defense attorney only. Of the other three:
1) "I do not do complicated." - $175
2) "You need an attorney located in [state] as I don't practice in [state]." - free when he informed me he couldn't help
3) "I cannot help you with the taxes. I limit my practice to estate planning only." - $250...he graciously indicated he would apply the payment to will preparation...
So I turned to the internet for help as a starting point to investigate further. And was able to get the help I needed.
Still have questions?Make a post