Basis determination on real estate obtained via a quit claim deed and joint tenants with survivorship

[Thermmann]

In 2019, and unknown to his children, my father in law fully executed a quit claim deed for $1 and named himself and his three children as tenants with rights of survivorship of the home in which he lived.  He was divorced and his wife, the children's mother, had previously passed.  We cannot find any evidence that gift tax forms were filed in 2019.  My wife was named his personal representative.

All 3 children have received 1099 S forms.  

For the basis calculation:

- start with the price he paid for the property?

- fair market value at the time of the quit claim deed (2019)?

- stepped up basis at time of his passing?

- stepped up basis at the time of the sale?

- the $1 named on the quit claim deed?

- other?

The quit claim deed was signed, witnessed and recorded.

[Thermmann]

I likely should mention that he passed in February 2022

[DianeW777]

First, the basis for the children will begin with the same basis as their father's basis at the time of the gift (2019) split between all of the owners which would mean it would be divided by four (three children and father).  Next, on the date of death of their father, his share would get a stepped up basis, then that portion would be divided by the three children remaining on the deed.

• Example: Father paid $50,000.  In 2019 it is divided by 4 giving each person a cost basis of $12,500.  In 2022 the fair market value is $75,000.  
• $75,000 divided by 4 = $18,750 which is now the stepped up basis for the father's portion only.  $18,750/3 children = $6,250 
• $12,500 + $6,250 = $18750 cost basis for each child on the date of death of their father. Or you could just stop at the stepped up value divided by 4 owners immediately preceding death.

The fact that a gift tax return was not done, does not change the outcome of the cost basis for the children.  The good news is they get to use the cost basis shown above and not the $1 transfer through the quit claim deed.  

[Hal_Al · Accepted solution]

Q.  What is the basis?

A. Probably stepped up basis at time of his passing.

The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you father-in-law paid for it). But there is an exception for the gift of his home, where he retained the right to live there ("life estate"). "If you give away an asset and keep a life estate in that asset..... the cost basis of the house is "stepped-up" to the value of the house on date of death [IRC 2036]")

More info: http://www.law.cornell.edu/cfr/text/26/20.2036-1

A life estate does not have to be explicitly established in the deed. Your father-in-law probably had an "implied life estate." If so, that would give you the stepped up basis. There is case law on this. 

http://accessiblelaw.org/Documents/LifeEstates-Inheritances.pdf(IRS document)

[Thermmann]

Thank you! 

As we had no  knowledge of this quit claim deed until after his passing it certainly left us unprepared. 

Great lesson here for me and my spouse to sit with our kids and explain everything in our estate, answer their questions that we can and seek guidance on those we cannot BEFORE THE FACT.  Like buying life insurance discussions. Not the most enjoyable exercise, discussing one's ultimate demise, but an absolutely critical exercise to prepare everyone what to expect and do for everyone's best benefit.  

We did a trust more than 10 years ago and have moved to a different state.  Today I made an appointment with a wills and estates attorney to consult about the need to review and update the trust and prepare the discussion with my daughters.

Thanks again!

[aglambert]

I have a related complicated situation: my father gave me property in California in 1986 via quit-claim deed and a $1 amount. I do not know if he filed gift tax or inheritance exclusion with his taxes that year. His intention was to protect some assets if he had legal trouble and, ultimately, to bequeath it to me.

He lived on an adjacent property (the property he gave me was a parcel connected to his) and I lived on the property he gave me until 1992. I then moved and he had access to the property as extension of his parcel from 1992 - 2008 (although his primary residence was on the adjacent separate parcel that stayed in his name.) In 2008 he got sick and moved into an apartment, and subsequently lost his business and house to debts. Since the gift was intended to enable me to support him in extremis, I took out a line-of-credit on the property to support him and settle some of his debts, and we rented the house and he collected the proceeds of the rent to supplement social security until he died.

Since he died I have collected the rent and last year I sold it to the tenant. Is my basis for the sale:
--$1 shown on Quit Claim deed?
--FMV of the house in 1986?
--Value as of his death in 2019 since he “retained” the rights to the property since he had access to it and collected rents that were paid until his death?

Thank you for any help provided.

[Hal_Al]

Q.  Is my basis for the sale:
a. $1 shown on Quit Claim deed?
b. FMV of the house in 1986?
c. Value as of his death in 2019 since he “retained” the rights to the property since he had access to it and       collected rents that were paid until his death?

d. What my father originally paid for it plus the cost of any improvements over the years. 

Answer: d

The usual rule, for a gift, is that the recipient's basis is the giver's basis and that appears to apply in this case. The life estate provision is only for the giver's primary residence and does not appear to apply in your case. 

[aglambert]

Thank you. Does it matter that 1) this was originally part of his property (40 acres), and he subdivided it (22 acres for him at top of hill, 18 acres in separate parcel gifted to me) and retained access rights via an easement for the time I owned it, and 2) I can show that all income from the property was for his benefit. He signed the lease for the tenant in his name and collected all rents until he died. I can also (I think) find records that all payments on the LOC I took out on the property were paid to him - I have paid down the LOC (and now paid it off), but all benefits accrued to him during his lifetime. This was our informal agreement when he gave me the property - it was protection for him if he was sued or was in debt, which is what what happened and I can show ~$400k of payments to him done based on the value of the property. It looks like I will have to pay capital gains and CA tax on those...

I am guessing the answer is no, but hoping. Assuming I have to go off of his basis, I think the sequence is something like the following:

1) Find what he paid for the land when he bought in in 1972 or so.

2) Divide that in ~1/2 since the parcel was split between his and mine

3) Add an estimate for the roads , shared well, and building cost for the structure on my property, which I assume has to be at 1970's prices. Is there a way to get a basis for that, or should I use current estimates for construction costs and deflate by the inflation between time of construction and now?

Thanks for your help. Wish the answer were different.

[Hal_Al]

Q.  Does it matter that .............? I am guessing the answer is no.

A. Yes, the answer is no.

Q. Since, I have to go off of his basis, I think the sequence is something like the following:

1) Find what he paid for the land when he bought in in 1972 or so.

2) Divide that in ~1/2 since the parcel was split between his and mine

3) Add an estimate for the roads , shared well, and building cost for the structure on my property, which I assume has to be at 1970's prices. Is there a way to get a basis for that, or should I use current estimates for construction costs and deflate by the inflation between time of construction and now?

A. Yes. Since you're only estimating, it doesn't matter which method you use. records of actual costs would be best, under scrutiny. 

[JJP2024]

Hey @DianeW777 

I am reading your response because I've been looking at a similar circumstance pertaining to one of my clients. I've went through it a couple of times and the statement "Or you could just stop at the stepped up value divided by 4 owners immediately preceding death" with the value of $18750 equaling the same $18750 value derived from taking into account your whole calculation only seem to equal one another by coincidence.  If you were to change that the father had paid $30,000 for the property in 2019 you wouldn't be able to say "Or you could just stop at the stepped up value divided by 4 owners immediately preceding death".