Capital Gains on sale of home stepped up value

[DaveF1006]

Since this was a gift to you, you would need to know the FMV of the property or what your fathers basis in the property was in 2008. If his adjusted basis was more than the FMV, then you would use the FMV of the house. Consequently, if the Adjusted Basis is less than the FMV, you would use the adjusted basis,

Also you may increase the basis by the amount of gift tax paid (if any) at the time of the gift. You do not need to report the proceeds given to your siblings because the details of the distribution were outlined in a will and will be treated as an inheritance to them. 

Just an FYI, the basis that your siblings will report on their returns is the FMV amount on the date your father passed. The basis amount will be split evenly amongst your siblings. When you report your share of the proceeds, you will need to use the 2008 amounts as I described above to report your sale. Be sure though to list any improvements made throughout the years since 2008 so you add this to your basis to lessen the overall tax impact on your return.

[mgawro01]

Thanks for all of the great information.  Since they purchased the house in 1964 ($13,500) determining the correct cost basis will make a big difference in the amount of capital gains.

Once he passed I never used the home as my residence.  I had it appraised and sold to nephew within months of his passing.

From what I hearing there are 3 options to determine the cost basis

50% of the value when they purchased it in 1964 plus 50% of value at time of his passing

50% of the value when I was added in 2008 plus 50% of the value at time of his passing

100% of the value at the time of his passing

All 3 will have very different results in the amount of taxes paid.   I'm just trying to figure out the correct one.

[Anonymous_]

Once again, everyone who posted here is getting something wrong and, in some cases, everything wrong (a large part of that is people are posting without reading previous posts).

@mgawro01 

1. When your Dad quitclaimed his interest in the house to you and reserved a life estate, he essentially made a gift to you, but it was a gift of a future interest (a remainder), not one-half of the property. For that year, a gift tax return (Form 709) should have been filed for the value of the remainder interest you received. However, since your Dad passed, that is now somewhat of a moot point.

2. The proceeds you gave to your siblings is, indeed, a gift since your interest passed outside the will. You received your interest in the property as a direct result of the deed and the language therein. Thus, you will most likely need to file a Form 709 for each gift that exceeds the annual exclusion amount. 

3. Your siblings do not have any basis in the property; you owned 100% of it since it passed to you upon the death of your Dad. Again, distributing part of the proceeds to your siblings would constitute a gift from you to your siblings.

[mgawro01]

I think I like your answer the best.  You are saying that the stepped up basis would be the value of the time of his death in 2023?

[Anonymous_ · Accepted solution]

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@mgawro01 wrote:

I think I like your answer the best.  You are saying that the stepped up basis would be the value of the time of his death in 2023?

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Yes, provided the facts are as you stated them; that your Dad quitclaimed the property to you while retaining a life estate for himself.

[mgawro01]

That is correct.   He quit claimed the property to me and continued to live there until his death.  The thought being I could just sell the house upon his death without going through probate.  

[Anonymous_]

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@mgawro01 wrote:

That is correct.   He quit claimed the property to me and continued to live there until his death.  The thought being I could just sell the house upon his death without going through probate.  

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Most likely, if the life estate was not specifically stated in the deed (as being retained), then there is certainly an excellent argument for an implied life estate - same result either way with respect to your basis being the fair market value on the date of your Dad's death.

You might want to seek guidance from a local tax professional and, if you decide to do so, mention an implied life estate and Section 20.2036-1 (if the person has never heard of this, try someone else).

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