Will I have to pay capital gains on parent's home now in my name?

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!

Thank you for the detailed reply!  It is very helpful.

The house was held as "“joint tenants with right of survivorship” by my parents.  I just want to clarify how I (when the time comes) would prove the cost of improvements.  This is a home that was purchased in the late 1960's for $20,000.  Since that time basically every inch of the building has been updated.

Just in the last decade the house has received a new roof, new windows, new siding, new furnace, a major kitchen remodel, a second floor that was gutted to studs and remodeled, etc.    I can't imagine my father has receipts for what is easily tens of thousands of dollars in improvements.  In truth, very little of the house I actually was raised in remains untouched. We estimate the house to now be worth over $200,000.  The value has not changed much due to the market since it was transferred to me and all improvements were completed before my mom's passing.

Must I prove the costs put into the house in improvements?  I truly would not know where to begin even now having him assemble documents. Fair market value I can determine, it's proof of the costs of the countless improvements that were made before it was gifted to me.

Thanks again!

Hi RyanH,
I understand the difficulty of proving the costs of improvements.  Of course, any documentation would be helpful, but few people would have saved receipts for that many years.  I recommend that you work with your father to develop a list of the improvements with approximate dates and estimated costs.  This will go a long way to providing a logical explanation for how you determined the basis when you eventually sell the home.
Having concrete proof of the basis is not necessary when you must report the sale of the home.  But in the unlikely event you are audited, the more information you have the better.the outcome.
Hope this helps!

Am in a similar situation.  Have no idea what the home originally cost or how much improvements cost.  Don't know what to do since we have no proof of how much the house improvements cost, plus sale proceeds received must be split with another sibling

It appears this house may have been deeded as a Life Estate. The question reads in part ..."A quit claim was done, filed and while he has life use the house has been "mine" since..." The statement "he has life use" is what caught my eye.

If that is true, then I believe the capital gains owed will have a cost basis of the homes Fair market Value as of the date of the fathers death minus any improvements made to prepare it for sale.

That is correct.

THANK YOU SO MUCH!  I know posted this question long ago however your "life use" comment does change alot. Yes, the house title has my name on it and under my father's name with "Life Use" clearly stated.  It was something I insisted on as I would NEVER dream of asking my father to leave the home my parents worked so hard to pay for and we were moving it to my name for estate purposes.

So while he is still healthy as can be (and we'll be 5 years after the title change next summer) it is very valuable to know that capital gains would be paid on the difference of the value of the house upon his eventual passing and the sale price. When my parents paid under $20k for the home one begins to wonder how this effects the family down the line.

However, just be aware that is the house is sold before his death (such as if he goes to a nursing home), it could be a bit more tricky, so try to avoid that if possible.

How do I find the fair market value of my mother’s home in the past?

To find the fair market value for your mother's home, real estate agents can help with that.  The value you need is the amount the home would possibly sell for as of her date of death.

Link to IRS web site about reporting Gifts & Inheritances

@Lennyz

Is there a worksheet for this basis calculation?  It’s somewhat complicated 

IRS Publication 523 contains a worksheet that will help you go through the many different items that can affect the basis of a home.  

Here is a link to the PDF version.  The worksheet starts on page 12.  IRS Publication 523

@Lennyz

My brother and I recently sold my parents home.  It was deeded into our name back in 2008.  We had a living will that my dad would live there as long as he wanted.  We lost our mother back in January 2017 and Dad decided that he wanted us to sell the house.   We did sell it March 30,2020 and he gave the money to my brother and  I to be split equally.  

The house was purchased back in 1976 for 20,000 and we sold it for 100,000.00... We have improvements on the home for 34,700.00

Do we have to pay capital gains on the house and also does the capital gains have to be paid within the first quarter of receiving this money?

You and your brother became owners of the house when the deed was put in your names in 2008.  In order to qualify for the capital gains exclusion the home would have to have been your primary home for 2 out of the past 5 years.  If you do not meet this test then you are unable to exclude any capital gains from the sale of the house.

This is a complicated situation that TurboTax does NOT support.  You need to go to a tax professional that is familiar with Life Estates, Remaindermen, etc.

Do I pay capital gains tax if:

my dad did a quit claim deed and gave me his half. My mom has the other half and lived there for 17 years.
I lived in the house for almost 17years, but only was on a deed for few months. We want to sell the house now. 

what is the reason for the sale?

since you did not own the house for any two out of five years before the sale, normally there would be no home sale exclusion available to you.

however,  a reduced exclusion may be available to you if the reason for sale is any of the following

1) health of either you or your mom, if the primary reason for the le is to obtain, provide, or facilitate the diagnosis, cure, mitigation or treatment of a disease or

2) the primary reason is a change in place of employment. the new place of employment must be at least 50 miles farther from the taxpayer's home than the former place of employment was or

3) unforeseen circumstances. this is a wide open category so the reason for the sale is critical. 

your basis in the home is your dad's basis on the date of the gift

2) 

The reason is for my mom to move closer to us. She is taking chemo. 
So it does not count that I lived in the house we’re selling for the last 2 out of 5 years? 
I was just put on a deed recently. 

@Pauls  - suggest seeing a local attorney to unravel this before the home sells.  could save you a lot of unncessary taxes. 

why did your father quit claim deed 1/2 to you and not Mom? there would be no FURTHER tax implixations if Mom owned 100% 

@Pauls  

So it does not count that I lived in the house we’re selling for the last 2 out of 5 years?

No, it does not count. You must have lived in the house as your primary residence for at least 2 of the last five years *YOU* owned it. You state you've only been on the deed "a couple of months" which gives me the impression the property was deeded to you in 2022. So you haven't lived in the house as your primary residence for even a full year *since you owned it*.

The reason is for my mom to move closer to us. She is taking chemo.

That's not really a valid reason for "you" having ownership the property.

@Pauls  Consult an elder care attorney ASAP.    If your mother ends up going on Medicaid (not to be confused with Medicare)   there is a five year lookback on any assets she owns that she gave away or transferred into someone else's name.   You had better understand that and plan accordingly. 

I can't see where to post a question without replying to something already posted by my question is similar.

My father and his sister inherited their parents house after they died.  It is a 3 family house and their parents lived on one of the floors.  My father and his sister don't live there.

My father eventually bought his sister's 1/2 out when she no longer wanted to own the property.

At the guidance of his lawyer, He quit claimed it to me for one dollar (which was never taken and I do not think I ever signed anything ) and retained a life estate on the property that kept it under his control and he paid the taxes and received whatever rent came in.  It did not allow me to sell, mortgage or do anything with the property without his consent and it would pass to my control after he died the lawyer said.  Supposedly this kept the house as his and directed where it went after his death, but separated it from the value of his estate for tax purposes.  It would not be mine until he passed which was why he paid the taxes took any rents etc.

He has since passed and the time has come to sell it.  What would my tax basis be?  The value of the quit claim for a dollar?  The value when he died and the house became under my control or some other number?

The lawyer may no longer be alive and I need to sell for medical reasons.

@nbhousenb your basis is the FMV on the date your father died. He should've filed a gift tax return when he gave you the remainder but that's neither here nor there now.

@nbhousenb 

With a life estate, you inherit the house with a fully stepped-up basis equal to the fair market value on the date he died.  (Everything that happened before is ignored). However, it would still be wise to see an attorney or tax professional.  To be valid, the deed would have been recorded in the county clerk's office, even if you never got a copy.  You need someone to look at that deed and make sure it really says life estate.  A life estate can also be implied based on the circumstances even if not written down, but if it wasn't written down, you will want to thoroughly document the circumstances in case you are later audited.  If the deed wasn't recorded with the county, that is also something that will need to be fixed before you can sell it.