Quit claim to siblings then sold 5 years after mom died

[mts658]

My mother in law quit claimed her home to her 5 children in 2017 then passed in 2018. The house was bought in 1960 for $60,000. It was sold to a developer in 2020 but 3 of the siblings remained living there and paying property taxes until the closing in 2023. It was valued at $750,000 on Realtor.com if purchased by a private party. Each sibling received $320,000. We put 300,000 into a cd and kept 20,000 for home improvement and medical expenses. I'm assuming the year of the closing date and money disbursement would be the same as the tax year.

1. Is this a gift and/or subject to capitol gains taxes?

2.  Would it be considered and inheritance and how would taxes affect it?

3. If it was put in a CD is there still taxes due on it or would it be deferred until any port of it is taken out?

4. How would the $20,000 be affected after used on home improvements and medical expenses?

[tagteam]

Given the proximity in time between the quitclaim deed and your mother's passing, you have an argument that she retained a life estate (by implication if not expressed in the deed) with you and your siblings receiving a remainder interest.

However, you should consult with a local tax professional and/or legal counsel considering the dollar amounts. If (when) you do, mention an "implied life estate" per Section 20.2036-1.

https://www.law.cornell.edu/cfr/text/26/20.2036-1

The foregoing will work toward your advantage in a major way in terms of taxation.

 

[TomD8]

I agree 100% with @tagteam that you should seek professional legal/tax assistance.  However, you might want to know some general principles that likely apply in your situation:

1.  Since ownership of the home was transferred to you & your siblings while the mother-in-law was still living, it was NOT an inheritance.  Legally, a transfer by quitclaim constitutes a gift, because no money changes hands.  A gift tax return should probably have been filed at the time.

2.  A capital gains tax is definitely owed.  Since the siblings both owned the home and lived in it as their primary residence for 3 years prior to the date of sale, they should each qualify for a capital gains exclusion of $250,000 on their portion of the gain.

3.  The capital gain is the net sale price less the donor's adjusted cost basis at the time the gift was made, plus any capital improvements made to the property after the sale.  This would be further adjusted if a gift tax was paid at the time of the quitclaim (highly unlikely).

4.  The interest earned by a CD is subject to ordinary income tax.  

5.  If any of the $20,000 was used for capital improvements to the home, that portion would be added to the cost basis.  A capital improvement is (for example) a room addition or a new roof, not a repair.

So I think you can see why professional assistance is recommended in your case.

[tagteam]

Although the tax result @TomD8 stated in the foregoing post may be technically correct in certain circumstances, they do not necessarily apply to the facts laid out in the original post.

Again, @mts658, you want to make the argument that the transfer via the quitclaim deed created, de facto, an implied (retained) life estate for your mother with the remainder to the siblings.

If your mother had a life estate, then the basis of the property in the hands of the siblings would be stepped up to its fair market value on the date of your mother's passing. This is a highly desirable result versus taking the property, in fee simple absolute, as a inter vivos gift at the time of the transfer.

A gift tax return should have been filed at the time of the transfer since the transfer included a future interest (the remainder to the siblings was a future interest). However, unless gift tax was owed (highly unlikely), there is no penalty for not doing so.

Again, refer to the link and Regulation in my previous post when you consult a tax professional and/or legal counsel.

[tagteam]

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@TomD8 wrote:

A capital gains tax is definitely owed....

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You need to read my initial post in this thread as the above-quoted statement is misleading and most likely in error.

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@TomD8 wrote:

Legally, a transfer by quitclaim constitutes a gift....

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As an all-encompassing, blanket statement ("legally"), that is false.

[dmertz]

For there to be a de facto life estate, it seems that there would have to be some evidence that the mother retained an interest in the property (an agreement that mother could remain in the home until then mother's death and the siblings were not permitted to sell the property prior to that):

https://casetext.com/case/shedlock-v-dir-div-of-taxation

[tagteam]

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@dmertz wrote:

For there to be a de facto life estate, it seems that there would have to be some evidence that the mother retained an interest in the property (an agreement that mother could remain in the home until then mother's death and the siblings were not permitted to sell the property prior to that):

https://casetext.com/case/shedlock-v-dir-div-of-taxation

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That "agreement" could be implied per Treas. Reg. § 20.2036-1(c):

An interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, express, or implied, that the interest or right would later be conferred.

The fact that the mother held and occupied the property as her home for decades and continued her occupancy after executing the quitclaim deed, without objection from the siblings, should be sufficient to imply that she intended to convey a remainder interest and retain a life estate for herself.

Further, with traditional life estates, the property cannot be sold without the express permission of the life tenant. In fact, the life tenant cannot convey the property without the consent of those holding a remainder interest (Lady Bird deeds, legal in five states, are an exception to that rule). Either party can convey whatever interest they have in the property (e.g., the remainder interest can be sold).

Your cite is to an NJ case which, in turn, cited the NJ SCT:

(1) the grantor or settlor must transfer some property, or interest therein, while retaining for his lifetime some or all of the economic benefits therefrom; (2) there must be a consequent postponement of enjoyment on the part of the grantee, promisee or other beneficiary; and (3) both the grantor's retention and the grantee's postponement of enjoyment must be for a period determinable by reference to the grantor's death.

The foregoing was then apparently "rephrased" but, regardless, that decision and the NJ SCT's factors carry no weight in the federal system and there is a federal case, fairly on point (but old), referring to Section 2036. 

[tagteam]

Here's that federal case (Fourth Circuit - from an ABA article):

Guynn v. United States:

The decedent transferred title to her home to her daughter, but “retained all the attributes of ownership except bare legal title. She remained in exclusive possession, paid the taxes, made improvements out of her own funds, and paid no rent. Again, the lack of treatment of the conveyance as a disposition caused the court to find an implied agreement that the transferor would retain possession and enjoyment.