1099-S Question (home sale proceeds)

[mblatour]

Hi there,

I have a question regarding the sale of a residence and the exclusion of gain. I had a client call me yesterday who had received a 1099-S from the lawfirm who handles his mother's affairs reporting $23,000 in proceeds from the sale of his mother's home.

Here's the scoop. Client is retired and his mother is in her 80's. She lived in her home up until last year on her own. Mom sold the house which was 20 miles away from the client to move into an apartment just down the road from my client and his brother (brother is also a client of mine and they both have houses near each other). Client states that he, his brother and his sister all were co-owners with mom on the house. When mom sold the house, she kept all monies from the sale with her....for now. Client says to me "I don't have to report anything as income, do I? I wouldn't mind so much if I had received money, but I didn't and neither did my siblings".

So I pull out my trusty Tax Book to read over the Exclusion of Gain section. On page 6-20 it states,

"A taxpayer who owns a home jointly with another individual can exclude gain from the sale of an interest in the home if the individual meets all three conditions. Co-owners must figure gain or loss according to his or her ownership interest in the home and then apply the exclusion rules on an indidvidual basis".

Mom owned the house (and lived in the house) for 30 years. She meets all three conditions and can exclude up to the $250,000 limit. I get that. But now being as the children are all three equal owners of the home WITH mom, are they somehow dragged into reporting "their" portion of gain based on having ownership interest in the home alone? If that's the case, I'm thinking that being co-owners wasn't such a great idea and the gain would have been excluded if it was all solely in mom's name; but I'm sure I'm missing something here.

I appreciate and thank you in advance for any help you can give me.

~Becky

[Burke]

You are thinking correctly. Mom gets to exclude her portion, the others claim the gain and pay tax. Their basis will be (1) what they actually paid for it; or (2) FMV of the portion they inherited; or (3) the original owner's basis of portion that was gifted to them.

[ChEAr$]

And

You are thinking correctly. Mom gets to exclude her portion, the others claim the gain and pay tax. Their basis will be (1) what they actually paid for it; or (2) FMV of the portion they inherited; or (3) the original owner's basis of portion that was gifted to them.

it sounds like the latter to me.

Establishing basis may not be easy; well , it won't be easy. If Dad died some time ago,
and the property had been jointly titled, and there are no records as to what it cost 30 years
ago, or whenever, much less records of improvements, that's one problem. the other is
the FMV of the property when dad died, cause mother may/probably takes 1/2 of it added
to her basis.

Can of worms.

Estimates may be only recourse and then with form 8275 , or whatever that disclosure
form is.

[mblatour]

what a pain....

that this could end up being. I'm going to ask client a few more questions to verify what the situation actually is.

Anyone else who has dealt with this before that can shed some light or direction on how to handle this sort of thing would be appreciated. Thanks!!

[ChEAr$]

One silver lining

might suface if your client is in a low marginal tax bracket, say 10 or 15%. The capital
gains tax comes out zero anyway.

[mblatour]

If only!!

He's usually in the 25% bracket and his brother is in the 15%. Why can't I be that lucky??

[fliszt]

Question to members:

Would their be some way to reclassify part of the 1099S on the tax return as a $12,000 gift from mother to sons? Just a thought.

[Burke]

Would their be some way to reclassify part of the 1099S on the tax return as a $12,000 gift from mother to sons? Just a thought.

Well, no, since they already owned it at the time of sale. So only the original gifted FMV amount would come under whatever the exemption amount was in the year gifted. (Used to be only $3,000 per year way back in the '80's). And besides, that is only the amount that is exempt from gift tax by the donor. They might check out the life estate calculations since the Mother continued to reside in the house. Courts have held that an "implied" life estate is valid. Also, since Mom kept all the money, she might be willing to pay the taxes out of the proceeds. (I guess children signed over their checks to her??). So now you have a gift back to the Mom from each child.

[fliszt]

Thanks for your reply.

Maybe mblatour can go back and see what can be done from the beginning. Value of property when husband died can be obtained from county assessor office from tax records. Then at least a stepped up value can be obtain. And as you (burke) said, hopefully mom will pay taxes for sons.
Thanks again.
Larry

[mblatour]

more info....

I spoke with my client again this afternoon and he verfied to me that he, his brother, his sister and his mom are all listed on the title. I asked him when his father died. He said well over 40 years ago. So the house that the parents had lived in was sold sometime after dad died. Then mom bought a different house (the one in question) and had that house for over 30 years before selling it in '08.

I also asked if he knows when he and his siblings were added to the title or if they were on it from the beginning. He said he didn't know when they were added.

And to make things more confusing, he said that he checked with his brother and sister and found out that they have yet to receive a 1099-S themselves. He received his over a week ago. Could just be a processing thing, but they were sent direct from the law office handling his mother's affairs. That confused me.

Based on this information, would I just have my client find out when he was added to the title and then go from FMV at that time or some other way?

He already plans on having mom pay the tax out of her house proceeds for whatever he ends up with at this time. He feels bad about it and so do I. What an unfortunate result of a decision made so long ago.

This is a new subject to me and I would really appreciate any direction I can get on this matter. Thank you for the replies thus far.

~Becky

[taxmandan]

... I asked him when his father died. He said well over 40 years ago. So the house that the parents had lived in was sold sometime after dad died. Then mom bought a different house (the one in question) and had that house for over 30 years before selling it in '08....

So there may have been deferred gain from the first house to this one. When she brings you her tax return from 30 years ago you'll be able to determine any deferral amount.





Sorry, couldn't stop myself.

Daniel

[mblatour]

I have more information.....

If my client would have informed me of this little tidbit, it would have saved me a lot of trouble. Turns out that at the closing of mom's house, there were 4 equal checks cut out of the proceeds, one to mom and one to each of 3 kids on the title.

After which the two brothers took to the bank and put their shares, and their mother's share (left sis out) into an accessible CD that mom could pull from when she needs money. But the only names on the CD are the two brothers. So they actually have to do the withdrawals and then give it to mom.

Any thoughts now?

[Burke]

So none of them have actually gifted the monies back to her. Just tell all of them to pay the tax on their share of the capital gains (they all should have received 1099's) out of the funds. They should be able to look at copies of all deeds on this house at their local city/county courthouse. They would have dates on them. It's public info. And those same records would record the cost at time of any sale. Tax records for later years may show values. The deed would also indicate whether life estate was established.