Sale of Parents Home

[johnski]

10 years ago my parents transferred the deed to their home to my name and my brother (50/50) with the agreement that they can live in the home until they die.  Well....time passes and parents are gone and we decided to sell the home.  How do I calculate what part of the sale is taxable?  We have owned the home for approximately 10 years.

[Carl]

Since the house was transferred to you two while the original owners (your parents) were still alive. It's considered a gift. So your cost basis in the house is whatever your parents paid for the house originally, plus the cost of any property improvements. You do *NOT* get a step-up in basis since the house was gifted to you, and not inherited upon their passing.

Each of you will report the sale in the "sale of home" section and each of  you will use 1/2 of the cost basis as your acquisition cost, and 1/2 of the sale price as your sales price.

Each of you will pay taxes on whatever gain you realize on the sale, that exceeds the original acquisition costs.

Neither of you will qualify for the "2 of last 5" capital gains exclusion since neither one of you lived in the home as your *PRIMARY* residence for 2 of the last 5 years you owned it. So for both of you, all of your profit on the sale is taxable income.

[tagteam · Accepted solution]

If your parents retained a life estate in the property, you and your brother (as remaindermen) will receive a stepped-up basis per Section 2036(a).

Your basis would be the fair market value on the date of death of the last of your parents to die.

Consequently, your gain, if any, will be calculated by the difference between the sales price and the fair market value on the date of death of the last to die.