Capital Gains, sold house from Quit Claim

[Twinbrow]

Sold house that was Quit claimed to me 5 years ago by my mother. Wanted to make sure I am claiming correctly.  I was not in the house for 2 years out of 5 but I can show it was my "place of residence" for the 8 months I was living there caring for my mother.  I have all the home improvements listed and calculated my partial resident exemption. I based the taxes off of long term. 15% fed and 9.9% state. I used the federal form to figure my adjusted credit against the 250,000.  I am using what my mother originally paid for the property. Anything that says uploaded was uploaded to the state website the year the work was completed so all of the improvements are on record or receipted. 

Capital Gain worksheet
Amount paid for property (not including mobile)	$67,000.00
Home improvement costs
1 New heat pump (Uploaded for assessment ******** county)	$8,182.00
2 New Fireplace (" Uploaded...")	$3,500.00
3 New Cabana (" Uploaded...")	$31,000.00
4 Roof Cover /Lean to (" Uploaded...")	$9,450.00
5	$0.00
6 Awning over deck, handicap stairs @ rails (" Uploaded...")	$16,740.00
7 New well and filtration (receipts)	$9,200.00
8 Roofing barn and well house (receipts)	$2,596.00
9 Gutters (receipts)	$1,045.00
10 closing costs (receipts)	$23,676.18
11 Mobile home on property (20K) (Bank Verified)	$20,000.00
12
13
14
15
Sold house for	$285,000.00
Adjusted tax base	$92,610.82
Owed Taxes before partial exemption	$23,152.71
Partial Exemptions (mother required to move into facility) Primary resident minimum 8 months over 5 years to care for mother. Partial against $250,000.	$83,333.33
Adjusted tax base with partial exemption	$9,277.49
Actual owed Taxes	$2,319.37

[tagteam]

Do you have a tax question concerning this transaction?

[Opus 17]

When your mother quit-claimed the house (gave you the house) she also gave you her cost basis.  You seem to have accounted for that correctly. However, your "adjusted tax base" is irrelevant, because the home may not be assessed at full value and items added to the tax base may or may not count towards the cost basis.  You need to know the adjusted cost basis.  The calculation is similar, but the difference is important.   Your mother also gifted you her holding period, so the sale is treated as a long-term capital gain.

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope... 

Not all closing costs are allowed as adjustments to basis.  See IRS publication 523 starting on page 8 for a list of allowable adjustments.

https://www.irs.gov/pub/irs-pdf/p523.pdf

However, it's not clear you qualify for a partial capital gains exclusion.  What is the unforeseeable financial hardship that forced you to sell before the two years was up?  I will assume your mother gave you the home knowing she was sick, and you came to live with her and care for her, and then 8 months later she needed residential care.  For you to claim a partial exclusion, you must meet one of the safe harbors, or you must show by other facts and circumstances that you had significant financial difficulties in keeping the home, and these difficulties were unforeseeable. 

(The safe harbors are death of a spouse or co-owner, divorce or separation, birth of twins, and loss of your job; none of which seem to apply.)

What facts and circumstances made you unable to live in the home after your mother went into residential care?  Not just a preference to move, but unable to remain in the home?  The fact that your mother needed care would have allowed her to sell, but she wasn't the owner, you were, and the rule applies to you, not her.  You need to show that you needed to sell due to an unforeseeable hardship.  And even if a hardship did exist, was it really unforeseeable?  It seems most probable that you could have reasonably foreseen your mother needing residential care and you wanting to sell and move.  

So without more from you, I don't think you qualify for the partial exclusion.  

For more, see publication 523 beginning on page 6. 

Real property is land plus anything permanently attached.  If the mobile home is not permanently attached, then it is separate tangible personal property, and you either sold it separately, or it was included in the contract for a nominal $1, or something like that.  (Similar to how if you sold the home with appliances, the appliances are not part of the real property and were technically sold for $1 along with the real property.)

Your tax calculation is incorrect.  I can't tell where you got your numbers.

Your numbers show an adjusted cost basis of $148,713--cost basis plus improvements that are permanently attached to the real property. I am ignoring the mobile home, and if the lean-to, awning or cabana are not permanently attached to the real property, they have to be taken off.  (For example, an awning erected over a parking space to create a covered car port would not be a property improvement since it can be removed.)

You have a selling price of $285,000 less selling expenses of $23,676 (assuming all the costs you included are allowable).

That gives a capital gain of $112,611.  That long-term gain is taxed (federally) at either 0%, 15% or 20%, depending on your filing status and your other income.  Without more information from you, I can't say, but most people pay 15%.

Most states don't have a separate capital gains rate so this will be added to your regular state income, state tax rates are between 3%-13% depending on the state and your income. 

If you did qualify for a partial exclusion, then your taxable capital gain would be $112,611-$83,333 = $29,278, which again, is taxed at 0%, 15% or 20% depending on your other income. 

[Twinbrow]

Thank you for the detailed response. The cabana and the rest of the items listed were pulled from the state web site attached to the house and all listed by Jackson county assessment as an improvement. I will follow up to make sure I can really take the improvement though, don't want it to come back and bite me. As far as the partial exemption I was going by the below from the IRS web site. My mother was being set up for in home care (wheelchair ramp and the works) but when she went to the hospital, they refused to release her. State was called in and I was "told" that she needed to go into a home, or the state would step in.  I have documentation from the primary, the hospital and the state. As a result, she was move closer to family into a home.  

Here are the 2 areas I was referring to, but I am a nub at this and will follow up to see if the exemption is possible or not.

From... IRS.Gov, Publication 523

Health-Related Move

• You moved to obtain, provide, or facilitate diagnosis,
cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.

• A doctor recommended a change in residence for you
because you were experiencing a health problem.
• The above is true of your spouse, a co-owner of the
home, or anyone else for whom the home was his or
her residence.

[Opus 17]

@Twinbrow 

It sounds like the problem with any of the permanent improvements is not going to be proving their existence but proving their cost, where your mother no longer has receipts. The county valuation may be fair, or the IRS may dispute it (In the unlikely event you are audited).  The IRS does not have to give you any basis adjustment that you can’t prove, so I suppose it depends on the attitude of the particular examiner. Certainly an improvement that raise the value of the property by $30,000 is not likely to have been given to your mother for free. If audited, you will have to make the best case you can for the cost of the improvements.

The problem with the partial exclusion rule is that you have to show how you, the owner, were impacted.  For example, if you and your mother lived in Los Angeles and your mother was diagnosed with a respiratory illness and was told she needed to move to a place with cleaner air, and you needed to sell your home to move with her because you were her caregiver, that would be a situation where your mother’s condition impacted your ownership of the home.  You haven’t provided any facts to your story that would explain how your ownership of the home was negatively affected by your mother moving out of the home and into a care facility.  I can imagine some hypothetical fact situations, but you haven’t said whether they are true. For example, if you are unemployed, and your mother gave you the home but she was paying utility bills, property taxes, and insurance, then her transition to residential care would leave you unable to pay the bills and you might have to sell the home to move into a smaller place that you could afford.

Separately, even if you can show that your mothers care situation created a negative financial impact on your ownership of the home, you must also show that it was unforeseeable at the time of the acquisition eight months prior. If it was foreseeable that your mothers medical condition might require her to move into a care facility, forcing you to sell, then you had the opportunity to make other financial arrangements that would’ve been less taxing to you.  To use the exclusion, the event must create a hardship that was unforeseeable.

You may want to review your situation with an accountant or professional tax planner. You may want to gather information on your mother’s medical condition, what are prognosis was when she gave you the home, whether her decline was sudden and unexpected or part of the normal course of her condition, and so on.

[Opus 17]

Note also that if the tax records are showing the current tax value of the improvements, that will not be the cost to build them.  Your adjusted cost basis must use the cost, rather than the current value.  If you don’t know the cost, you might make a fair estimate, but the IRS may deny the adjustment without proof if you are unlucky to be audited.  

[Twinbrow]

Again, thank you. We all read and interpret best scenarios in our favor.  I have always done my own taxes but this has convinced me to seek professional help this year. I do not want or need any financial surprises. It is much appreciated that you are taking the time to share your expertise here.