Sale of Family Home in Joint tenancy

[Hello786]

Hello,

My family and I have lived in our family home for 20+ years. My father passed away 5 years ago so my mother, my two sisters, and I lived together in the home. I have married andone of my sisters has married. She no longer lives with us.  A year after my father passed one of my sisters and I were added to the title of the deed to refinance our mortgage and I began handling all of the expenses and activities for the house. We refinanced again later on and added my older sister so that all of us were on title. Fast forward to today we want to sell the house, but are not sure about taxes involved. We want to make it as simple as we can come tax time.

If the closing attorney must file a 1099 with all 6 of the joint tenants listed, but I am the only one who receives proceeds to my bank account can I claim the 100% of the sale price of the house, 100% adjusted cost basis, and 100% of the profit on my tax return? Can I still claim the $500k tax exemption since I am married filing jointly?

Do the others need to report the sale on their taxes if they didnt recieve proceeds?

[tagteam · Accepted solution]

In short, anyone who receives proceeds from the sale or receives a 1099-S will have to report the sale. Typically, the proceeds are divided in accordance with the interests in the property (e.g, 1/6 share each).

You do, however, need to figure the basis for each owner, otherwise, and you have to start with your mother who, after your father passed, presumably succeeded to the own the property in severalty (i.e., she was the sole owner). At that time, the property's basis was stepped up to its fair market value on the date of your father's death. Whether the basis was stepped up for her share only or for in its entirety depends upon whether it was community property.

Subsequently, there was a gift (presumably from your mother) to you and one of your sisters and, later, a gift from you, your mother, and your sister to your other sister. The basis for each needs to be determined in the event they have to report a share of the proceeds from the sale.

You should consult with the closing attorney and/or a local tax professional for this matter.

[rjs]

tagteam said that when your father passed "the property's basis was stepped up to its fair market value on the date of your father's death." That's not necessarily true.

You didn't say who owned the home before your father passed, or what state you all live in. If your father was the sole owner, and your mother inherited the entire property, then yes, her basis was stepped up to the fair market value on the date of your father's death. But if your father and mother owned the home jointly, and you are not in a community property state, only the half interest that your mother inherited from your father gets stepped-up basis. The half that your mother already owned before your father passed does not get stepped-up basis. However, if they owned it jointly in a community property state, your mother got the stepped-up basis on the entire property when your father passed.

As tagteam said, you and the other owners absolutely need to consult a tax professional for help handling the taxes, including determining each owner's basis. I wouldn't rely on a real estate lawyer for tax advice, but you need the lawyer to determine each person's percentage of ownership. You should do that before the sale, so the 1099-S forms and the distribution of the proceeds reflect the proper percentages. So you probably need both a tax professional and a lawyer.

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@Hello786 wrote:

We want to make it as simple as we can come tax time.

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There is no way to make this simple.

[tagteam]

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@rjs wrote:

tagteam said that when your father passed "the property's basis was stepped up to its fair market value on the date of your father's death." That's not necessarily true.

That is correct but note that I added: "Whether the basis was stepped up for her share only or for in its entirety depends upon whether it was community property."

[Hello786]

Thanks for your feedback. We live in NC which I believe is not a community property state. 

Would it make sense to do a quitclaim deed at closing to give all interest in the property to me if all my family members agree? My thought on this is that it would allow me to handle all the tax obligations with my $500k exclusion and have my name on the 1099 alone. This would also allow the adjusted cost basis to be mine alone and would be equal to the adjusted cost basis my mother had when my father passed. I feel like this would be easisest and since it is all family no one will have objections. What are your thoughts?

[tagteam]

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@Hello786 wrote:

Would it make sense to do a quitclaim deed at closing to give all interest in the property to me if all my family members agree? My thought on this is that it would allow me to handle all the tax obligations with my $500k exclusion and have my name on the 1099 alone.

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You would essentially be gaming the system as there were completed gifts from your mother to you and your sister and then to one of your sisters from you, your mother, and your other sister. Now, with a QC, you would basically have a gift from your sisters and your mother to you (it is not possible to hide this chain of title unless deeds were not recorded).

This is a complicated scenario and that is not even taking the fling of a Form 709 by each donor into consideration. You really should consult a tax professional.

Note that you can use your home sale exclusion if you owned and used the home as your main home for two out of the last five years leading up to the sale (for your share).

[Hello786]

Thanks I will definitely discuss with a tax professional, but it helps to have some idea of the options that you are providing. 

Two more things regarding the exemption: 

Can we each claim the $250k or $500k exemption if we leave everything as is? 

If we decide to do a quitclaim and give all interest in the property to me will this affect my ability to claim the exemption because the share of the property from my siblings was only held for less than 2 years?

Thanks in advance!

[tagteam]

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@Hello786 wrote:

Can we each claim the $250k or $500k exemption if we leave everything as is? 

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$500k if married filing jointly.

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@Hello786 wrote:

If we decide to do a quitclaim and give all interest in the property to me will this affect my ability to claim the exemption because the share of the property from my siblings was only held for less than 2 years?

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Yes, for the exact reason you stated above. You would only be able to apply the exemption to the share you owned for two (or more) years.

[rjs]

@Hello786 

In your original question you mentioned "all 6 of the joint tenants" being listed at the closing. You and your two sisters are 3 of the 6. Who are the other 3 owners? Spouses of you and your sisters? But you said one of your sisters is not married. When and how did the other 3 become part owners? It's not clear whether you and your married sister were already married when you became part owners, or married afterwards. These are some important details that you haven't provided, and they might affect your quitclaim plan. But don't even bother to explain the details here. It's just more that you have to discuss with the tax professional.

[Hello786]

Thanks for your feedback. I was reading up on similar cases to mine. In a few instances even though property was held in joint tenancy, the individuals all agreed or intended for one individual to have complete ownership of the property and to collect all profit from the gain of its sale. This is something I did not think to clarify originally. When I took over managing the expenses and maintaining the house after my father passed, all of my family members agreed that I should have full ownership of the home to do with as I see fit because I paid all the bills and took care of all the issues with the home.

If this was the intent, and everyone agrees to this fact, would I be incorrect in claiming 100% of the proceeds and gain? Would I be able to claim the full cost basis my mother attained upon my fathers death? This is assumming the closing attorney agrees to file a 1099 with only my name. Does intent of how the home should be held supercede the way it would be divided according to who is listed on the deed?

If this is true the only gift would then have been from my mother to me for 100% share of the home. We did not know that a gift tax would need to be filed and I will need to check with her accountant to see if it was. If not should we file it after the fact even though no tax would have been due? Is there any penalty since no tax was due?

Thanks again.

[rjs]

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@Hello786 wrote:

If this was the intent, and everyone agrees to this fact, would I be incorrect in claiming 100% of the proceeds and gain? Would I be able to claim the full cost basis my mother attained upon my fathers death? This is assumming the closing attorney agrees to file a 1099 with only my name. Does intent of how the home should be held supercede the way it would be divided according to who is listed on the deed?

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I think that's a big stretch. On the face of it I would say no, you can't do that. But ask a lawyer.

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@Hello786 wrote:

We did not know that a gift tax would need to be filed and I will need to check with her accountant to see if it was. If not should we file it after the fact even though no tax would have been due?

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Ask the accountant. It's your mother who should have filed the gift tax return. (And her accountant should have advised her to file it, but maybe she didn't tell him about the gift.) If your mother's estate is already closed, I don't know how a gift tax return would be filed, or what the effect would be of filing it now. But again, ask a tax professional or an estate lawyer.

You need competent professional advice, not anonymous opinions on the internet.