Estate Deeds and Capital Gains Taxes

[Deepak Walia]

Jurisdiction

New York

My parents bought a house together in the early 1970's for $65,000. They divorced in 2000 and my mom got the house as part of the divorce settlement. I live with my mom and take care of her (she is 90). We setup up a estate deed (with both my mom's name as my name) to protect assets from medical bills that may arise. I have a few questions:

1) If we decide to sell the house now (while mom is alive), will capital gains have to be paid from the original $65,000 purchase price? Or was the price of the home reset in 2000 when the house was awarded to my mom through the divorce?

2) If mom passes and I sell the house afterwards, what are the capital gains tax implications?

3) What is the best possible thing to do to avoid capital gains?

Thank You.

 

[army judge]

1) If we decide to sell the house now (while mom is alive), will capital gains have to be paid from the original $65,000 purchase price? Or was the price of the home reset in 2000 when the house was awarded to my mom through the divorce?

2) If mom passes and I sell the house afterwards, what are the capital gains tax implications?

3) What is the best possible thing to do to avoid capital gains?

No one on this site is allowed to provide you specific legal and/or tax advice.

If you desire such guidance, you need to hire the services of a licensed CPA, tax attorney, or financial adviser.

Don't trust your finances to unknown to you internet denizens, doing so might end up costing you far more than you can imagine.

 

[Foamback]

Hopefully an estate attorney or CPA can get this straightened out to accomplish what you want and/or need. What you have already done is contrary to what you say you wanted to accomplish.

The basis of the property did not reset in 2000. And since you are already on title, you will inherit sole title at the 1970's value basis.

Since your mother is on title, the house is not shielded from the long arm of Medicaid, if applicable. And since your mother is 90, and the lookback is five years, dodging this is statistically unlikely

Good luck

 

[flyingron]

By estate deed, I'm presuming you mean she granted you the house while retaining a life estate.

As @Foamback points out a life estate isn't necessarily a good strategy. It would be the same as if she just outright gave it to you as far as medicaid is concerned which means she may find herself ineligible for benefits (and unless you're willing to give up your interest, she won't be able to unilateraly fix this).

It also opens up your mother to all sorts of liabilities if something should happen to you. The property would be subject to being foreclosed upon for your debts and if you die it becomes part of your estate and it could end up being transferred to someone else.

It really behooves you to do some actual estate planning rather than trying to game the system with half-assed ideas.

 

[Tax Counsel]

My parents bought a house together in the early 1970's for $65,000. They divorced in 2000 and my mom got the house as part of the divorce settlement. I live with my mom and take care of her (she is 90). We setup up a estate deed (with both my mom's name as my name) to protect assets from medical bills that may arise.

What do you mean by an "estate deed"? Do you simply mean that you were added to the deed as an owner of the house or is there more to it than that? And how is the house titled: tenants in common or joint tenants with a right of survivorship?

1) If we decide to sell the house now (while mom is alive), will capital gains have to be paid from the original $65,000 purchase price? Or was the price of the home reset in 2000 when the house was awarded to my mom through the divorce?

Divorce does not change the basis in property. Assuming that you did not pay your mother anything for your share of the property and assuming that there were no improvements made to the property that would increase basis, you each would have a basis of $32,500 in your share of the property. In other words, the basis would be unchanged from the purchase price, assuming those facts. Note that your mother likely needed to file a federal gift tax return for giving you half interest in the house. No gift tax would be paid until the very large unified gift and estate tax credit had been surpassed, but it's still useful and important to file the gift tax return.

2) If mom passes and I sell the house afterwards, what are the capital gains tax implications?

Just from the information you provided here, the federal income tax result would be that your mother's half of the basis would be reset to the fair market value (FMV) of that half on the day she died. The basis in your half would remain unchanged. This is why generally estate and tax planners would not recommend simply adding a child to the title of real estate. If she died as the sole owner of the property then the entire basis in the home would be reset to FMV. There are some limited reasons to add a kid to the deed that outweigh the tax disadvantages, but that's not very common.

3) What is the best possible thing to do to avoid capital gains?

In order to fix the tax end of this, you need both legal and tax advice. So I recommend you see either a tax attorney or an estate planning attorney who has good knowledge of the income tax basis rules for help. Your mother would need to regain sole ownership of the home for the estate to get the full basis step up and wipe out all the gain that has built up since she and her ex husband bought it. But it's not as simple as just giving your mom a deed transferring back your half of the home because you also need to take into account the effects that would have on other things, like the benefits she receives and what medicaid may recover when she dies. It may be that you are now stuck with this situation as it is at this point in time. There are a lot more facts I'd want to see before I could provide any information specific to your particular situation. Given the amount taxes and benefits that are issue it would be well worth paying that attorney for some advice.

 

[Coldermore]

My parents bought a house together in the early 1970's for $65,000. They divorced in 2000 and my mom got the house as part of the divorce settlement. I live with my mom and take care of her (she is 90). We setup up a estate deed (with both my mom's name as my name) to protect assets from medical bills that may arise. I have a few questions:

1) If we decide to sell the house now (while mom is alive), will capital gains have to be paid from the original $65,000 purchase price? Or was the price of the home reset in 2000 when the house was awarded to my mom through the divorce?

2) If mom passes and I sell the house afterwards, what are the capital gains tax implications?

3) What is the best possible thing to do to choose estate planning Downers Grove?

Thank You.

The basis of the house for capital gains tax purposes would be "stepped up" to the fair market value at the time of your mother's passing if she leaves it to you in her will or through inheritance. This means you would calculate capital gains tax based on the value of the house at the time of her death, not the original purchase price.

If you sell the house after your mother's passing, any appreciation in value from the stepped-up basis would be subject to capital gains tax, but you would inherit her basis, potentially reducing your tax liability.

To avoid or minimize capital gains tax, you might consider holding onto the house until your mother's passing to take advantage of the stepped-up basis. Additionally, consulting with a tax professional can help explore any available exemptions or strategies to reduce tax liability.

P.S: It's my opinion and suggestion and can be wrong.