Capital Gains on sale of home stepped up value

[mgawro01]

The state is Massachusetts.  In 2008 my Mom passed and my Dad decided to remove her from the deed and add me at the same time.  Not thinking of the tax consequences at the time.  During that time he retained the right to live there (life estate).   We'll he passed in 2023 and with me being on the deed it made it easy to sell the house to my Nephew.   I had the house appraised when he passed at 300K.   I sold to Nephew for 250K.  I split the proceeds among my siblings.   When I report the sale of the home does the value step up to the value at 2008 or 2023?   If 2023 and sold for less can it be reported as a loss?  Also do I have to report the proceeds to siblings as a gift?  It was stated in his will to split his estate. Thanks

[DianeW777]

The cost basis for you will be half of the fair market value (FMV) on the date of death and half of your father's actual cost of the home since it was actually gifted to you in 2008.  You may have to use an educated amount from information you have. You would have been considered equal owner with your father during those years from the date your name was put on the deed.

Once you determine the cost basis for yourself you will report the sale for your half of the house.  As far as your siblings they would report their proportionate share using your half the FMV on the date of death ($300k per your information) for the half they actually inherited.  Since your father put you name on the house, the other siblings were entitled to his half of the house as inheritance. They would split the half of FMV between them.  

If you did not live in the home it would be considered an investment sale, not a home sale. It would be the same for any of the siblings.

If you were issued a 1099-S, you can issue a 1099-S to each of them for the part of the proceeds they each received. It moves from you to them (assuming you did receive a Form 1099-S, if not there is nothing for you to complete for them).

Nominee returns. 

Generally, if you receive a Form 1099 for amounts that actually belong to another person or entity, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received).  You must also furnish a Form 1099 to each of the other owners. 

File the new Form 1099 with Form 1096 (this is a transmittal for the 1099) by mailing to the Internal Revenue Service Center for your area. (Provided on the Form 1096)

• On each new Form 1099, list yourself as the payer and the other owner, as the recipient. On Form 1096, list yourself as the nominee filer, not the original payer.  The nominee is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.

The forms filed with the IRS should be the red copy so if you don't have a color printer, go to the IRS website and order the forms here: 

• Form 1099-S
• Form 1096

[tagteam]

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@mgawro01 wrote:

Also do I have to report the proceeds to siblings as a gift?  It was stated in his will to split his estate.

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If you were the only "remainderman" (the only person on the deed that would succeed in ownership following the life estate), then you were the sole owner by operation of law after your father's passing.

As a result, the will would be ineffective to pass title as it passed outside the will (outside the estate).

You should seek local legal counsel and/or guidance from a tax professional for this matter.

[mgawro01]

Thanks for answering my question.   Just want to confirm your statement below.  So if I determine my cost basis to be $170K and I sold the house for $250K do I only report the sale for half of the house ($125K)? A loss in this case

I received a check for the sale and wrote a check to each of my siblings from my account does that change anything?

"Once you determine the cost basis for yourself you will report the sale for your half of the house."

[tagteam]

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@mgawro01 wrote:

"Once you determine the cost basis for yourself you will report the sale for your half of the house."

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Sorry, that's wrong. Title to the house did not pass via the will; title, as a remainderman, passed to you (in fee simple) outside of the will.

The form of the deed overrides whatever is stated in the will and title passes by operation of law according to what is stated in the deed.

Technically, you were entitled to retain the entire amount of the proceeds from the sale (the house was yours). If you split any of the proceeds with your siblings, that would be a gift from you to them.

Also, note that after your Mom passed, your Dad most likely owned the property in severalty (i.e. fee simple by himself) since, presumably, your Mom and Dad held title as JTWROS. As a result, after your Dad added you as a remainderman of his life estate (on the deed) and then passed, your basis was stepped up to the fair market value of the property on the date of his passing. 

[mgawro01]

If I understand you correctly my cost basis is the value at  the time of my Dads passing (300K).  I sold for $250K so I would have a loss of $50k on the sale?

[AmyC]

The whole group is saying we don't know what your parent's situation was with the title when she passed. We aren't sure about your addition and the wording used. We don't know how your siblings come into this and if they were on the house or mentioned somewhere legally. There are several ways to determine your basis depending on the facts.

@tagteam did a great job and made a note guessing about your dad owning the property alone and  an assumption  for your addition.

[mgawro01]

Both My Dads and Moms name were on the original deed when they purchased the house (both listed as Grantee).  When my Mom passed we filed a quit claim deed to remove my Moms name from the deed and added my name to the deed.  My siblings weren't listed on the deed.  My Dad listed as Grantor and I was Grantee.  Hope that helps

[RobertB4444]

In that case @DianeW777 's answer above is correct.  Your cost basis is 50% of the amount that your parents originally paid for the house plus 50% of the value of the house on the date of your dad's death.  Add those two together and subtract it from the amount you receive from the sale of the house and you will have your taxable gain.  Any money you choose to give to your siblings is a non-tax -deductible gift.

@mgawro01 

[mgawro01]

One last question on using 50% of my parents original cost basis.  Can I add cost of any improvements to their original cost basis (new roof, HVAC, etc) or just have to use the amount they originally paid for the house?

Thanks

[DawnC]

Yes, you can add the cost of home improvements to adjust the cost basis.   

• A capital improvement that adds value to your home, prolongs its life, or adapts it to new uses can be added to the cost basis of your home and subtracted from the sales price to determine the amount of your profit when you sell it.
 

• The cost of repairs, such as fixing a gutter, painting a room, or replacing a window pane, cannot be added to your cost basis or deducted from your sales price.

[tagteam]

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@mgawro01 wrote:

Both My Dads and Moms name were on the original deed when they purchased the house (both listed as Grantee).  When my Mom passed we filed a quit claim deed to remove my Moms name from the deed and added my name to the deed.  My siblings weren't listed on the deed.  My Dad listed as Grantor and I was Grantee.  Hope that helps

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Again:

When your Mom passed, your Dad immediately became the sole owner of the property (in fee simple absolute). At that point, your Dad took your Mom's one-half at a basis which was stepped up to fair market value on the date of your Mom's passing. Therefore, your father's basis was one-half of the stepped-up basis he acquired from your Mom and one-half of his original cost basis (plus the cost of any improvements). Note that if they resided in a community property state, your Dad would have received a stepped-up basis for the entire property (not just one-half).

When your Dad added you to the deed as a remainderman (if he did, in fact, retain a life estate as you previously stated), you were given what is called a future interest and, depending upon state law, that interest was irrevocable and a completed gift (technically, a gift tax return should have been filed). 

When your Dad passed, his life estate ended and you became sole owner (in fee simple absolute) and, at that time, your basis would have been stepped up to its full fair market value on the date of your Dad's passing, per Section 1014.

The reason some who are answering in this thread believe one-half of your basis is your Mom's basis is, I believe, because your Mom was on the deed when she passed and your Dad had her removed and added you. However, removing your Mom from the deed was actually not necessary and you received nothing from your Mom as she had already passed leaving your Dad as the sole owner when he quitclaimed the property to you and reserved a life estate for himself. Your interest in the property came directly from your Dad, not your Mom.

[Opus 17]

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@mgawro01 wrote:

One last question on using 50% of my parents original cost basis.  Can I add cost of any improvements to their original cost basis (new roof, HVAC, etc) or just have to use the amount they originally paid for the house?

Thanks

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There's a lot going on here.

I'm going to ignore the issue of life estate for a moment and just think about cost basis, and try and clarify some things for you.

1. Your parent's cost basis as of the day before your mom died in 2008 is equal to the price they paid for the home plus any permanent  improvements they made before her death.  Also, some of their closing costs can be added to the basis.  See publication 523 for a discussion of cost basis and also the difference between repairs and improvements.  (For example, if they replaced the roof in 2005 and again in 2020, only the second one counts since it is still part of the house but the first one is gone.)

https://www.irs.gov/forms-pubs/about-publication-523

2. Then, when your mother died, your father received an adjusted cost basis for half the value of the home on the day your mom died.  Basically, he keeps his half of the home at his original cost basis, and he inherits half the home at a cost basis equal to the fair market value in 2008.  This is his new adjusted cost basis. 

3. Then a few days or weeks later, your Dad puts you on the deed.  You get half the house and half of his adjusted cost basis as of the date of the gift (his partially stepped-up basis).

4. Then, you and your Dad can add to your cost basis, the cost of improvements you made between 2008 and 2023.  That will give you your adjusted cost basis on the day before your father died.

5. What happened when your father died is something I will leave to others to describe, because I'm sure I will get the nuance wrong.  You may want to discuss your situation with a local tax professional or attorney.

In the worst case scenario, you inherited your father's half of the house using a stepped up basis equal to half the FMV on the date he died, which is added to your basis for the other half of the house.  In the best case scenario, you inherited the entire house with a fully stepped-up basis.  It might be easiest to write down a flow chart or timeline to figure your basis under the two different scenarios.

6. Next, you sell the house.  You are the only owner, so we ignore the fact that you split the proceeds with other siblings.  If there is any tax to be paid, you are fully responsible since you are the full owner, and if there is a deductible loss, it is only reported on your tax return.  

• -If you sold for $250K and had a fully stepped up basis, then you have a loss of $50K.
• -If you had a partially stepped up basis, you may have a smaller loss or a gain.

Actually, your loss is a bit more because you can subtract the real estate commission and maybe some of your closing costs from the selling price.

If you never used the home as your personal residence, and considered it an investment that you were selling as soon as you inherited it, then any loss is tax deductible.  However, if you used the home for personal purposes and it was personal property, you can't deduct a loss if you had one.  The fact that you sold to your nephew does not change the deductibility of the loss because he is not closely enough related to affect things.

7. Last of all, you split the proceeds with your siblings.  Because you were sole owner, this was a gift from you to them.  (The fact that your dad asked in his Will for you to do this is treated as a suggestion or request.  If it was all your house, then you made a personal gift.). If the amount of the gift was more than $17,000 per person, you should report it on a gift tax return form 709.  Payment of gift tax is not owed unless your total lifetime gifts are more than $13million, but you must file the form so the IRS can keep track of your large gifts.  This form is not included in Turbotax and is not e-filed, although the deadline is the same (April 15).  Download a copy from the IRS web site, fill it out, and mail it to the address in the instructions. 

https://www.irs.gov/forms-pubs/about-form-709

8. I think you probably received a fully stepped-up basis and not a partial step-up.  But you may want a personal legal opinion.  

[tagteam]

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@Opus 17 wrote:

3. Then a few days or weeks later, your Dad puts you on the deed.  You get half the house and half of his adjusted cost basis as of the date of the gift (his partially stepped-up basis).

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No, because @mgawro01 stated, "During that time he retained the right to live there (life estate)".  

If that was the case, then @mgawro01 had a remainder interest while Dad had a life estate. 

[tagteam]

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@Opus 17 wrote:

8. I think you probably received a fully stepped-up basis and not a partial step-up.  But you may want a personal legal opinion.  

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Section 1014 provides a step-up basis for property acquired from a decedent (which is the case here).

Section 2036 provides that the value of the gross estate as the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer under which he has retained for his life.....

As a result, there is a full step-up in basis.