@Sandyjb555 wrote:
Also if they paid out 86,000 for both
Sold both for 447,000
I then deduct the 86,000 paid fot both.
So the actual profit was 447,000 - 86,000= 361,000 profit for both together. 180,500 profit each
Ok. You are missing some concepts, but we have enough details to know what is going on.
Capital gains is the difference between selling price and adjusted cost basis. Basis is (more or less) the amount of already-taxed dollars invested in the property. It starts with the price the grandmother (and grandfather?) originally paid, possibly many years ago. It can then be adjusted upwards by the cost of permanent improvements, adjusted downwards by depreciation or business use, and by certain life events. If you can't prove your basis and you are audited, the IRS can assign a basis of zero, making the entire sales proceeds into taxable gain. But the more basis you can document, the less gain you have.
From the point of view of the grandsons:
1. Each grandson was gifted 1/3 of the property in (about) 2010. At that time, they also received 1/3 of the giver's cost basis. Let's assume grandmother purchased the property many years ago for $30,000 and we don't know of any other adjustments. Each grandson now has a cost basis of $10,000 for their share of the property. (The market value on the date of the gift doesn't matter.)
2. In early 2021, each grandson paid $43,000 for a 1/6 share of the property. This adds to their cost basis. Each grandson now owns 1/2 the property with a $53,000 basis.
3. In late 2021, each grandson sold their 1/2 share in the property for $223,500. 2/3 of their proceeds are long term capital gains, because they owned that part of the property more than 1 year, and 1/3 of their proceeds are short term capital gains, because they owned that part of the property less than 1 year.
4. When the grandsons file their tax returns, each grandson will report a long term capital gain and a short term capital gain
| |
Proceeds |
Cost basis |
Gain |
| Long term share (2/6) |
$149,000 |
$35,333 |
$113,667 |
| Short term share (1/6) |
$74,500 |
$17,666 |
$57,734 |
Remember, this calculation is assuming the cost basis of the gift portion is $10,000. You will need to repeat the calculation after you determine the actual basis as I discuss later.
5. It still doesn't matter how you divide the cost basis between the house and the land. A straight percentage basis is simplest. Since 29% of the proceeds were from the house, you can assign 29% of the basis to the house. It won't actually change the grandson's tax since both sales happened in the same tax year.
6. If you received a 1099-S for the sale of either parcel, you will need to report a total of 4 sales in Turbotax (2 short term gains and 2 long term gains). Turbotax might be able to take 1 sale and allocate short and long term gains, so you would report two transactions instead of 4. I haven't tested this part of the program. The important thing is that 2/3 of the gain is a long term gain and you will pay double the tax you actually owe if you report the entire gain as short term. If you can't figure out how to report the sale in Turbotax, see an accountant. The tax saving will more than pay for the cost of a professional tax service.
7. You can reduce your taxable gain by documenting the grandson's cost basis in the gifted portion of the property, which is 1/3 the grandmother's basis for each 1/3 share of ownership.
The grandmother's basis starts with the purchase price of the property. This will be recorded in county records no matter how long ago it was. You can increase the basis by the cost of permanent improvements (new furnace, new roof, etc.). But, be aware that only improvements that are still part of the property will count. If the roof was replaced in 1980 and again in 2005, only the cost of the 2005 roof counts.
You must decrease the basis if the property was used in business and deduction for depreciation was or could have been taken. You also have to reduce the basis if you claimed a tax deduction for a casualty loss (like storm damage), but you can increase the basis by the cost of repairs, if repairs were made.
If the home was co-owned by spouses (grandmother and grandfather) then the basis is increased when the grandfather died, because grandmother inherited his half at that time. Suppose the property was purchased for $30,000, and it was worth $100,000 when grandfather died in 2005. The grandmother's basis is now $15,000 (her half of $30,000) plus $50,000 (the market value of grandfather's half when he died), or $65,000. If they lived in a community property state, then grandmother's adjusted basis is the entire full market value on the date grandfather died. A real estate appraiser can do a backdated appraisal using historical records.
8. So between now and tax season, if you want to minimize the amount of tax each grandson will owe, you should take steps to document as much of grandmother's cost basis as you can prove.
You may also want a tax professional to prepare your tax returns this year.
