Gifted Real Property Now Sold

[Scorp_930]

In 1994 my mother transferred ownership of her home to her three children and removed herself via a quitclaim. She died in 2003 and one child continued to live in the house and was not charged any rent by the other two.

Around 2006, the 1/3 ownership of the child living in the house was purchased by the other two children at the approximate fair market value at the time.  That child continued to live in the house without paying rent.

In 2020 the child in the house died, and the two owners sold the house.

Over the years, some improvements were made by the two owners, as well as some in preparation for the sale.

How is the cost basis for this house determined?  1994 or 2006?  Fair Market Value or Tax valuation at that time?  Besides improvement costs, how is the cost of the 1/3 purchase factored in?

[Anonymous_]

In what form was ownership of the property being held (e.g., joint tenancy, tenancy in common)?

If you held title as tenants in common, then one-third of the basis for you and your sibling is what you and your sibling paid the third sibling in 2006.

The other two-thirds would generally be a carryover basis from your mother (i.e., your mother's adjusted cost basis) since the 1994 transfer appears to have been a gift. However, if the fair market value at the time of the gift was less than your mother's adjusted basis, then you would use the fair market value on the date of the gift (1994) to figure a loss (which loss would not be deductible since the property was held for personal use).

You would then need to add the cost of any improvements you and your sibling made over the years.

[Scorp_930]

Thank you for the response.

I don't know the answer to your first question, but let's assume it is tenants in common. 

Using real numbers, the 2006 transaction (actually 2004) was recorded as $24,100, which would be 1/3rd of the then FMV.  We each paid the third 50% of that amount at the time for his share.  We must have arbitrarily estimated at the time that the FMV was $72,000?

We sold the home in 2020 for $74,000, divided equally between the two of us.  From this, it seems like my cost basis is $12,050 (50% of the 2004 transaction) and my sale proceeds (in 2020) are $37,000 (less selling expenses, the net being a little less than $34K)?

I don't understand your comments about the carryover basis for my mother in 1994?  I don't know how to determine the FMV for 1994?  My memory says she bought the house in 1953 for $12,000.  

And, I thought the gift is not taxable to me(us)?

Basically, I need to know where to start in TurboTax to report this transaction?

[Hal_Al]

If the house was bought for $12,000 in 1953, that basis transferred to the 3 siblings in  1994 ($4000 each).

You bought out the third sibling for $24,100 in 2004.  Your basis  in your half is $4000 + 12, 050 = $16050.  Your sibling's basis is the same.   You may add the cost any improvements (but not repairs) made over the years.

The gift was not taxable, but Mom's  basis transferred to you.  She shoulda filed a gift tax return, in 1994, unless  each sibling's share value was less than the gift tax exemption amount (that was probably the case).

[Anonymous_ · Accepted solution]

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@Scorp_930 wrote:

Basically, I need to know where to start in TurboTax to report this transaction?

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You can report the transaction in the Stocks, Mutual Funds, Bonds, Other section (under Investment Income) - see screenshot below. Indicate that you did not receive a 1099-B and then select Second home as the asset you sold and proceed through the subsequent screens.

You can also report the transaction in the Sale of Home (gain or loss) section (under Less Common Income).

[Scorp_930]

Thanks for all of the help.  The referenced section, apparently, is not ready yet?

Not sure how I'm going to determine the 1953 cost basis beyond my own guess?  The county is not being helpful so far, claiming they don't keep those records.

[Anonymous_ · Accepted solution]

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@Scorp_930 wrote:

Not sure how I'm going to determine the 1953 cost basis beyond my own guess? 

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If you have to guess then you have to be prepared in the event the IRS requests that you provide something that corroborates that guess. If you have nothing whatsoever, you may then be required to use a zero basis.

[Scorp_930]

A new wrinkle to your response to my original question.

Was this a 'gift' or 'inherited property'?

My brother is claiming that this property was actually inherited, which of course has much more favorable tax consequences.  And I read something online that sort of supports that claim.

The specifics were that in 1994, my mother transferred the property to her three children, maybe via a 'Quit Claim'?  In any event, she remained in the house until she died in 2003.

From what I've read, the fact that she remained in the house makes the property remain part of her estate in the eyes of the IRS, making it an inheritance, and stepping up the cost basis to the market value at the time of her death.

Of course, I can no longer find the Google reference that I found but do these facts make any sense?

[Anonymous_]

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@Scorp_930 wrote:

....the fact that she remained in the house makes the property remain part of her estate in the eyes of the IRS, making it an inheritance......

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The result is not in dispute on these facts. If you mother actually transferred full ownership to the property (in fee simple, without reserving a life estate for herself), then it was not in her estate when she passed and could not, therefore, have been considered to be acquired from a decedent.

As a result, the property was not inherited (i..e, not acquired from a decedent) and, thus, no stepped up basis.

[Hal_Al]

@Scorp_930 

Your brother is probably right.  The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you mother paid for it). But there is an exception for the gift of her home, where she retained the right to live there ("life estate"). (invalid link deleted) which states in part "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 mother probably had an "implied life estate." If so, that would give you the stepped up basis of an inheritance . There is case law on this. 

 Your basis  in your half is 1/3 of the Fair Market value (FMV) in 2003 + $12, 050. 

[Anonymous_]

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@Hal_Al wrote:

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

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One has to use extreme caution when relying on case law. For one thing, the IRS does not always accept, nor is it obligated to accept, the decisions of tax courts. Further, cases are fact-specific and may not have universal applicability.

For example, in at least two cases, the transferor (donor) continued to reside in the property but the expenses (e.g., property taxes, utilities) were paid by the donees (i.e., evidence demonstrating that there was some sort of "understanding"). Another case holding there was an implied life estate was overruled by the Second Circuit. In short, this is not an area of well-settled law particularly since certain state courts (relying on state law) have held that no life estate exists absent a grant or reservation of the same in writing.

I understand the Reg refers to an "implied understanding" but, again, militating against such an understanding are other factors relating to dominion and control pursuant to state law as well as specific facts and circumstances.

I would thus recommend consulting a local tax attorney for specific advice and guidance.

ADDENDUM: With respect to tax court cases (and even cases brought in the district courts), one needs to exercise caution concerning the result (holding of the court) not only on the facts but as to what precipitated the filing of the case. For example, I believe one will find that most, if not all, of the "implied life estate" cases were brought as a result of an asserted estate tax deficiency. In other words, the IRS was actually arguing that there should be an "implied life estate" so that the property would be included in the gross estate of the decedent and, as a result, additional estate tax would be due. Obviously, since positions taken by the IRS militate in favor of collecting more revenue, the results of any cases involving those positions should be viewed in that light. 

[Scorp_930]

Thank you for this answer.

However, the first link does not work, plus it appears to refer to the UK and not the US?

The second link is good but is going to require some careful reading.

This appears to be in the ballpark for our situation, however.

[Hal_Al]

Google something like ""life estate deed step up in basis" or "gift deed life estate stepped up basis"

You'll get plenty of references like  https://www.esslawfirm.com/articles/factors-to-consider-when-transfering-a-residence-for-elder-law-a....

Which states, in part, "Pursuant to ‘ 2036(a) of the IRC, the transfer of a residence with a retained life estate permits the transferee of the residence to receive a full step up in his or her cost basis in the premises upon the death of the transferor, to its fair market value on the transferor’s date of death).

"

You'll get plenty of references like  https://www.esslawfirm.com/articles/factors-to-consider-when-transfering-a-residence-for-elder-law-a....

Which states, in part, "Pursuant to ‘ 2036(a) of the IRC, the transfer of a residence with a retained life estate permits the transferee of the residence to receive a full step up in his or her cost basis in the premises upon the death of the transferor, to its fair market value on the transferor’s date of death).

[Anonymous_]

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@Hal_Al wrote:

Google something like "life estate deed step up in basis"

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That is correct, except those are all instances where the property is included in the gross estate of the decedent.

If the property is not included in the gross estate of the decedent, there is no step up in basis.

The saving grace on the facts presented by @Scorp_930 in this thread is most likely the relatively low market value of the property as that value makes it unlikely to be questioned by the IRS.

[Scorp_930]

I agree with your last paragraph as a probable reality.  A complicated scenario for such a small result.

This certainly seems an example of @Hal_Al's 'implied life estate'. She Quit Claimed in 1994 but lived out her life in the house until 2003.  She likely maintained the costs of the home until that time even though my youngest brother was living there as well.

There are no public records of any transaction in 2003, with the next transaction being our purchase of the 1/3rd chare in 2004.