Actually, the 1099-S isn't "filed" anywhere with any tax return. But why do you even have a 1099-S at all? You say the home was deeded to you via quit-claim. So what does the bank that issued the 1099-S have to do with that? Since the 1099-S is only issued of the issuer paid money to you in a financial transaction related to the property, this "sounds" to me like it was more than just a quit claim.
But the fact that you got a 1099-S means that the transaction has to be reported on your tax return no matter what. SO what monetary transaction occurred that resulted in you being issued a 1099-S? This just doesn't make sense to me.
Sorry, I forgot to mention the most important part. We sold the property last year. We all got 1099-S with our portion of the proceeds reported.
When was the gift? Did your father retain a life estate? Did he previously own the home with a spouse who passed away? What state do you live in?
Assuming you "each" received a separate 1099-S, if the property was deeded to you by the previous owner before that owner died, then your cost basis is that original owner's cost basis, plus the cost of any property improvements done after the original owner before you, purchased it.
So for each of you, assuming your individual 1099-S's report your individual share of the proceeds, your cost basis will be 1/5 for each of you. You'll be reporting actual numbers on the tax return, of which it is rare for any of those numbers to "agree" with the 1099-S. The 1099-S only shows the cash you received at the closing. That does not mean that all of that cash is taxable, or that the cash received is the "only" taxable portion of the sale.
So you'll report your 5th of everything on your tax return, "as if" you never received a 1099-S. If you keep looking for something asking you for any amounts reported on the 1099-S, you'll go crazy because you'll never find it.
You owe capital gains tax on your gain, the difference between adjusted cost basis and selling price. In your case, each sibling reports 1/5 the selling price and 1/5 the cost basis.
The selling price can be reduced by certain costs of selling like transfer taxes, mortgage recording fees, and inspections or surveys you paid for as part of the sale.
Cost basis will be the problem. In the end, make the best good faith determination you can, but remember that if audited, the IRS does not have to credit you with any basis you can't prove.
The first thing you need to know is the form of the deed. If your father retained a "life estate"--the right to live in the home until his death, and you could not sell it before then--then you inherited the home, even though there was a quit claim deed in the past. You inherit a stepped-up cost basis; your cost basis is the fair market value of the home on the day he died. If you sold the home immediately, the FMV is probably the selling price. If there was a delay, you may need a real estate appraisal.
If there was no life estate, if you obtained the home "in fee simple", then your father gave you his cost basis, which is now your own.
His adjusted cost basis is:
His original purchase price plus original closing costs plus the cost of permanent improvements he made minus depreciation he took or could have taken for business use of the home (home office, rental). Then you can take a further adjustment for any improvements you and your siblings made after inheriting the home and before selling it.
An improvement is not a repair. An improvement adds value to the property or extends the useful life of the property or its sub-systems, and must be attached to the real property (land and anything permanently attached.) Things like an addition, a new roof, new furnace. If you made the same improvement more than once, like replacing the furnace, only count the one that is still part of the home. If you don't know the cost of improvements, you can estimate, but remember the IRS will not award any basis you can't prove. Any estimates are at your own risk.
If your father owned the home with a spouse who died before he did, then your father has another adjustment to his basis. If he did not live in a community property state, he inherited one-half the home when his spouse died and gets a basis adjustment. For example, the home was purchased for $20,000 and there was a $10,000 renovation to the kitchen. Your father and mother each had a $15,000 basis. When your mother died, the fair market value of the home was $100,000. Your father inherits half the house with a stepped up basis ($50,000) so his total adjusted basis is now $65,000.
If they lived in a community property state, he inherited the entire house will a fully stepped up basis at the fair market value. If you need the FMV for a past date like the date your mother died, a qualified appraiser can usually give a value based on historical sales records.
Then, whichever type of stepped up basis your father got, you would add any improvements he or you made after his spouse's death.
So your starting point is to answer the following questions:
1. Was the quit claim deed in fee simple or did he retain a life estate.
2. How much did he pay when he bought the house (find this in county records)
3. Did he own the home with a spouse who died before him? (you probably know this or it will also be in the county records)
4. What was the value of the home when his spouse died? (get an appraisal)
5. Did they live in a community property state?
6. What was the cost and date of any improvements? (estimate at your own risk)
7. Was the home ever used as a rental or home office (an account can estimate the amount of depreciation taken or you will need to review his past tax returns).
Hi Opus17. I appreciate your reply to the question on capital gains and cost basis. It's a challenge to understand cost basis and adjusted cost basis when gifted a house. You mentioned if a spouse dies, the surviving spouse, in a community property state, gets an adjusted cost basis at time of death. Did I understand this correctly? I live in CA. My parents bought a house for 100,000. Years later my dad died. The estate appraisal show the value was 250,000 at his death. My mom deeded/transferred the house to me for "no consideration" many years later prior to her death. Is my adjusted cost basis 100,000 (their purchase price) or 250,000 (FMV at time of his death)? plus improvements. Thank you and if you have any links on this, I'd appreciate it so much.
@mack12345 wrote:
Hi Opus17. I appreciate your reply to the question on capital gains and cost basis. It's a challenge to understand cost basis and adjusted cost basis when gifted a house. You mentioned if a spouse dies, the surviving spouse, in a community property state, gets an adjusted cost basis at time of death. Did I understand this correctly? I live in CA. My parents bought a house for 100,000. Years later my dad died. The estate appraisal show the value was 250,000 at his death. My mom deeded/transferred the house to me for "no consideration" many years later prior to her death. Is my adjusted cost basis 100,000 (their purchase price) or 250,000 (FMV at time of his death)? plus improvements. Thank you and if you have any links on this, I'd appreciate it so much.
In a community property state, the spouse inherits the full stepped up basis. The only exception seems to be if the property has more than two owners, so that the spouses own less than a half share each. So your mother's basis on the day of your father's death would be the full FMV at that time, then her basis is adjusted by any improvements until she gifted it to you, when her basis becomes your basis. Then your basis is further adjusted by improvements you made after that.
(Also note, that use of the home as a rental, or in business, or home office deduction, or claiming a casualty loss, can reduce your basis.)
See IRS publication 551
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
https://www.irs.gov/publications/p551#en_US_201812_publink1000257014
Hello again. Revisiting this topic as now it is time to file taxes on the gifted property I sold. Does FMV at the time have any value. At time of gift, my mom's stepped up basis was 250,000. The FMV when she gift it to me was 460,000. If I understand correctly, my basis is her basis and not the FMV at time of gift. Thank you so much!
Hello again.
Revisiting this topic as now it is time to file taxes on the gifted property I sold.
Does FMV at the time of gift have any relevance/value? At time of gift, my mom's stepped up basis was 250,000. The FMV when she gifted it to me was 460,000. If I understand correctly, my basis is her basis, and unfortunately, it is not the FMV at time of gift.
Thank you so much!
@mack12345 wrote:
Hello again.
Revisiting this topic as now it is time to file taxes on the gifted property I sold.
Does FMV at the time of gift have any relevance/value? At time of gift, my mom's stepped up basis was 250,000. The FMV when she gifted it to me was 460,000. If I understand correctly, my basis is her basis, and unfortunately, it is not the FMV at time of gift.
Thank you so much!
Correct. When she gave you her property, she also "gave" you her basis. You do not get an adjustment for the FMV at the time of the gift.
(For this reason, such gifts should be reviewed with a tax planner ahead of time. There may have been a way to accomplish the same overall goal -- whatever that was -- with less tax.)
Opus17. You've been so helpful. I'm clear now on my cost basis. Thank you. The home I sold has been owned by me for many years. I married in March 2021; sold in Oct 2021. So my home was acquired by me before marriage. We do live in California. My spouse does not meet ownership or use requirement of the home I sold (he is not on deed) for capital gains exclusion. I meet it for the 250,000. Can we file married filing separately in California? Any special considerations? Are there any special rules for me regarding the 1099 and taking the 250,000 exclusion I qualify for on my MFS taxes. Does he have to record anything about the sale on his return? I appreciate your expertise
Opus17. You've been so helpful. I'm clear now on my cost basis. Thank you. The home I sold has been owned by me for many years. I married in March 2021; sold in Oct 2021. So my home was acquired by me before marriage. We do live in California. My spouse does not meet ownership or use requirement of the home I sold (he is not on deed) for capital gains exclusion. I meet it for the 250,000. Can we file married filing separately in California? Any special considerations? Are there any special rules for me regarding the 1099 and taking the 250,000 exclusion I qualify for on my MFS taxes. Does he have to record anything about the sale on his return? I appreciate your expertise
Sorry if this is a duplicate message. I don't see it being sent in my activity thread.
Opus 17 You've been so helpful. I'm clear now on my cost basis. Thank you. The home I sold has been owned by me for many years. I married in March 2021; sold in Oct 2021. So my home was acquired by me before marriage. We do live in California. My spouse does not meet ownership or use requirement of the home I sold (he is not on deed) for capital gains exclusion. I meet it for the 250,000. Can we file married filing separately in California? Any special considerations? Are there any special rules for me regarding the 1099 and taking the 250,000 exclusion I qualify for on my MFS taxes. Does he have to record anything about the sale on his return? I appreciate your expertise
@mack12345 wrote:
Opus17. You've been so helpful. I'm clear now on my cost basis. Thank you. The home I sold has been owned by me for many years. I married in March 2021; sold in Oct 2021. So my home was acquired by me before marriage. We do live in California. My spouse does not meet ownership or use requirement of the home I sold (he is not on deed) for capital gains exclusion. I meet it for the 250,000. Can we file married filing separately in California? Any special considerations? Are there any special rules for me regarding the 1099 and taking the 250,000 exclusion I qualify for on my MFS taxes. Does he have to record anything about the sale on his return? I appreciate your expertise
Marriage imparts ownership, so that is not an issue. If your spouse lived in the home for 2 years as their main home (more than 730 days), even if you were not married, they can claim their portion of the exclusion.
Filing separately will almost always cause you to pay more tax, and it is especially complicated in a community property state like California. There is no reason not to file jointly, you should be able to just claim your exclusion (Turbotax should ask if you and your spouse qualify separately. It should not give you the $500K automatically.)
Hi.
My spouse lived in the home I sold as his residence for 16 months immediately prior to the sale.
He was my spouse for 7 of those 16 months. It sounds like he meets the ownership through marriage even though the marriage overlaps only 7 months of my home ownership. Being we are in California, I now understand the community property publication. I didn't realize a home I acquired before marriage is considered community property in meeting ownership eligibility test for the cap gains exclusion.
Is that correct? And if so, then could he qualify for a partial exclusion for the 16/24 months if we file married joint?
@mack12345 wrote:
Hi.
My spouse lived in the home I sold as his residence for 16 months immediately prior to the sale.
He was my spouse for 7 of those 16 months. It sounds like he meets the ownership through marriage even though the marriage overlaps only 7 months of my home ownership. Being we are in California, I now understand the community property publication. I didn't realize a home I acquired before marriage is considered community property in meeting ownership eligibility test for the cap gains exclusion.
Is that correct? And if so, then could he qualify for a partial exclusion for the 16/24 months if we file married joint?
If your spouse lived in the home as their main home for 16 months before the sale, they don't qualify for the full exclusion, because it was not more than 2 years.
They might qualify for a partial exclusion, but only if the home sale was due to one of the circumstances listed in publication 523 as qualifying for a partial exclusion. These include a job change of more than 50 miles, medical necessity, or other unforeseen circumstances that would have created a financial hardship to stay there. (In that case, they can exclude 16/24 or $166,666 and you can exclude $250,000. I'm not sure Turbotax handles that complicated an exclusion, we can test it if you think your spouse can qualify for a partial exclusion.)
See page 6. https://www.irs.gov/pub/irs-pdf/p523.pdf
Opus 17 You've provided many answers/support /facts that have been very helpful. I'm a little anxious to do my own taxes during year of home sale. It was a rental for 3 years before my 2 years occupancy. Do you offer forms filing assistance through the platform or externally provide tax services? Thank you
In the Sale of Home section, TurboTax asks (for each of you) how many months you lived in the home during a particular time period.
It will do the 'partial exclusion' calculation for your spouse since he lived in the home for a different amount of time than you did.
Click this link for more info on Partial Home Sale Exclusion.
@mack12345 wrote:
Opus 17 You've provided many answers/support /facts that have been very helpful. I'm a little anxious to do my own taxes during year of home sale. It was a rental for 3 years before my 2 years occupancy. Do you offer forms filing assistance through the platform or externally provide tax services? Thank you
I don't do private tax work. If you feel you need confirmation you are doing the right thing you can upgrade to Turbotax Live to get an expert review. Or you can upgrade to Full Service.
The prior rental raises new issues. The rental period is non-qualified for the capital gains exclusion. (This is not well-described in current IRS instructions, but Turbotax will perform the calculation correctly.) Also, you have to repay any depreciation you claimed or could have claimed during the rental period.
The first part of your capital gains attributable to depreciation is taxed as ordinary income with a max rate of 25%. 3/5 of the rest of the gain is non-qualified and not eligible for the exclusion so it is taxed as a long term capital gain at a reduced rate, and 2/5 of the gain is qualified and eligible for the exclusion. You can exclude up to $250,000 of the qualified gain, and if your qualified gain is more than $250,000, your spouse can exclude a partial amount if you moved for one of the safe harbor reasons. If your qualified gain is more than your exclusion, that will also be a long term capital gain.
Hi again. Turbo Tax Live is a great idea.
Is there something else I should have done to take it out of service? I have lots receipts showing my occupancy- homeowners insurance, utilities, etc.
Not clear on non qualified use. I'll read up on that.
Thank you Opus 17!
Non-qualified use means the period during which home was not used as the principal residence.
When a home is converted to a rental property and later sold there are special items that need to be accounted for when calculating gain or loss on the sale
The IRS requires that you use the LOWER of the original purchase price, 2002 in your case, or the fair market value when it was converted to a rental in 2015 as your basis.
However, there are other factors that must be considered in calculating the gain/loss on a rental that was originally your home.
If a residence converted to a rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken. If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)).
This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property.
@mack12345