Do I file my Mom's gift tax and do I file as her?

[Opus 17 · Accepted solution]

OK, let's sum up.

1. If your mother was a US person, and gifted you a house that was worth $150,000 at the time of the gift, she was required to file a gift tax return for the year of the gift.  You can do that now; you would write "deceased" and the date across the top and sign in your name with "signing as administrator".  However, no gift tax is owed unless her lifetime total of gifts plus estate was more than $5 million.  So I don't really know if the IRS would care much.  You can run it by the tax advisor you need for the house sale.

2. For the house sale, you owe capital gains tax if the sales price is more than your cost basis; the value on the date of the gift is ignored.

For determining cost basis, it matters how the gift and deed were worded.  There is a concept called "life estate" -- the previous owner retains a right to live in the home, can't be displaced, and remains responsible for taxes, maintenance, etc.  See this http://www.susanmooney.com/?page_id=530

Because you don't really have any rights with a life estate until the life tenant dies, the IRS considers that you inherit the home.  That means you inherit a stepped up cost basis -- your cost basis is the value of the home on the date your mother died.  That means that if you sell it shortly after she dies for roughly the same price as the value on the date she died, you owe no capital gains tax at all.  You might even have a deductible loss -- suppose the fair value on the date she died was $90,000, and you sold it for $90,000, but paid $5,000 in real estate commissions and transfer taxes.  That means you have a capital loss of $5,000 and can deduct that against other income.  If you wanted to claim an even greater loss, I would be very careful to document the fair market value on the date of her death, with a qualified appraisal or other documents.  Remember if you are audited the IRS won't give you any basis you can't prove.

On the other hand, she might have given you the home "in fee simple" -- a straight gift with no strings attached.  In that case, she also gifted you her cost basis -- what she paid to buy the land and build the home (you can't count her own labor she did for free or volunteer/ friend labor, but you count amounts paid to contractors and for supplies.  You have a taxable gain if the selling price is more than the cost basis.  You will need to do your best to document your cost basis because, as said, if audited, the IRS does not have to give you any basis you can't prove.

You may need to see a tax attorney to determine if your deed or gift letter meets the very strict IRS rules to show that it was a life estate entitling you to a stepped up basis.

[sandorbatyi]

Thank you so much, this detailed answer narrowed my problem down to a daunting task of finding someone who can give me an appraisal of the house in March 2016, unless you think the value specified on the life estate deed will suffice the IRS. Especially, since I'm not after any gains or losses and we are talking about a rural village in eastern europe, which is an hour drive from the nearest metropolitan area.

[Opus 17]

If this was a legitimate life estate that will meet the IRS test for a stepped up basis, then your problem is finding the value as of March 2016.

The only reliably proven value you have is $90,000 in 2017.  I think that if you used a value of $150,000 based on the gift letter from September 2014, and you are audited, you will be in trouble.  Using that value will create a $60,000 capital loss.  You can use that loss to offset other capital gains (such as from sale of stocks).  If have no capital gains to offset, you can deduct $3000 of the loss each year and carry the rest forward for up to 20 years.  That gives the IRS 23 years to audit your claimed loss.

You have no reliable proof that $150,000 was an accurate value in 2014.  It could have been a false value made up by you or your mom for self-serving purposes, or it could have been her unrealistic hope for a value.  And even if $150,000 was an accurate value, it is unlikely (unless there was some kind of disaster) that the house held its value until March 2016 and then suddenly lost 40% of its value in the next 15 months.  It seems more likely that the house was on a long slow decline, or that it was never worth $150,000 and that was just your mom's wishful thinking.

There will be someone even in rural Hungary who is qualified to give an estimate of local property values.  Such as from sales of other similar properties from a similar time frame (Spring 2016).  Of course, it may be difficult to contact such a person.

You say you don't want to claim losses.  In that case, the least controversial value you could report is that it was worth $90,000 on the day she died.  And really, unless something terrible happened to the neighborhood or the Hungarian economy, that's probably correct anyway -- the house was probably worth about the same in March 2016 as it was worth in July 2017.  If you have sales expenses like taxes and fees, that will create a small one-time deductible loss which is unlikely to raise concerns.

[sandorbatyi]

Thank you for the follow up. BTW, I'm using Google currency converter; I gather that this is the best way to go: file now, her 2014 gift tax return, using 2017 July's sold price of $120K rather than the deed's written (today's) converted value of 135K.
Sorry, new thought came to mind: Whenever I need to write a dollar amount, do I use the current conversion valueat the time I write it, or should it be at a different time?