Capital gain on sale of property

[DTarabo]

So my parents purchased a home, but for Medicare reasons the deed went under my brother’s name and few yrs later under mine.  All the while my parents lived there.  We recently sold the home.  Do I pay tax on the capital gain? What amount will the tax be on? I didn’t purchase the home so will I be stuck paying tax on the entire sale of the home or the difference (sale price minus purchase price)? Improvements were also made on the home, but parents paid for them not me. Also Does it matter that the home was passed from my brother after he received it in his name? I am so confused.

[OldTaxDude]

Good news, and bad news.  The good news is that you will probably not have as much gain as you think.  The transfer of the house to your name is a gift.  Your tax basis in the house is equal to whatever your parent's paid for it, plus the cost of the improvements.  Say they bought it for $165K, and spent $35K on improvements.  It ends up in your name, and you sell it for $250K.  Your taxable gain is only $50K (250 - 200).  Now this is true only if the value of the home exceeded their cost basis (the hypothetical $200K here) at the time it was transferred to your brother, and at the time it was transferred to you.  Say they spent the $200K, but at the time it was transferred to your brother, it was worth $180K.  Then it's transferred to you when the value is $195K, and you sell it for $250K.    Because the value was lower than cost when your brother got it, the value becomes the tax basis.  When you get it, you take his basis because the value is higher.  So, you now end up with a taxable gain of $70K.  I realize that's a lot to digest, but that's how it works.  If you can document what your parents spent, I'd just use that.

Now the bad news.   The transfers are taxable gifts.  Not to you.  To your parents when they gave it to your brother, and to your brother when he gave it to you.  There are annual exemptions and lifetime exemptions/credits that likely eliminate the tax.  Unless we're talking a home in the $millions, I'd not worry about it.    

[DTarabo]

So I get the first part, for the second.....u r saying that the new basis would be the $180K? The value when my brother got it, not the $195K value when I received it? If he also added improvements before giving to me can I add those to the $180K?

There aren’t many receipts since much was done in cash but we may have some credit card statements for materials, is that enough or do we need actual receipts?

As for the gift tax, do I still need to file form 709 if I have a lifetime allowance? Or will not filing be a problem? Can it be done later? I transferred $17000 to my sister, is that an issue?

Thx again for your answers.

[OldTaxDude]

That's what I'm saying.  The basis in property received by gift is the lesser of value or the giver's basis.  In the example, your brother's basis became $180.  When he gives it to you, that becomes your basis because it's lower than the then value. 

I'd use my best estimate on the cost of improvements.  Support what you can with receipts.  You'll need them only if you're audited.

Please realize that I'm providing examples to illustrate the tax law.  It's difficult to follow in practice.  If you understand the risks,  you could report the sale and use your parents' purchase price and cost of improvements as your basis.  That would be correct if there was no downturn in value from when they bought it to when you received it. 

You don't need to file the 709 as recipient.  Your brother does as giver, as would your parents.