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!
