Flood Loss

[bekzm]

Client was deeded his home from his parents the 29th of December 2010 for $10. He has lived in the house rent free for 15 years decorating and remolding In June 2011 his house was flooded from levies that broke. He received $47,000 from insurance company. The FMV of house before the flood was valued at $114,325 and after the flood the FMV was the house was valued at $36,000. No insurance for contents and they got a lot of the contents out before it got to bad.

Purchased another house for $52,000 with the insurance money but guess trying to ask - they would have had a capital gain if they did not replace the house within a certain time frame due to the house being deeded to them in 2010. Is there anything since he lived there 15 years that could help or it is as it is?????

[Gary2]

but guess trying to ask

I'm not sure I understand what you mean by this. Are you asking, hypothetically, if they didn't replace the property, then are there other options for not being hit with the gain?

First, his basis isn't $10. It's his parent's basis. This seems like a gift, and his parents will have to file a gift tax return (though probably not pay anything). So, depending on their basis, there may not be a gain.

Second, there's a rule for a reduced exemption on the sale of a home if the reason for the sale is unforeseen circumstances, which certainly includes flooding. It would be based on the amount of time he actually owned the house. See Pub. 523.

[bekzm]

Confused

So if the parents deeded the property to there son Dec 29, 2010 - it is not the taxpayers home - it is still the parents?

The home is still standing but the flood has done terrible damage and the insurance said in order for them to live in it again, they will have about $95,000 to have it fixed to standards.

The client received $41,700 from the insurance and purchased another house. It was not issured to the parents due to the deeding it to the son for $10. As far as the parents - know nothing about them or what they are doing or did. I assume they took care of that.

With the son living there over 15 years while the parents lived in another house - now I'm confuse at the cost for the son due to the insurance reimbursement from the insurance company. The son actually did not purchase the house the way I see it or did they?? Could it be a different basis at the time of deed?

[Gary2]

So if the parents deeded the property to there son Dec 29, 2010 - it is not the taxpayers home - it is still the parents?

No, I didn't say that. What makes you think that?

The son actually did not purchase the house the way I see it or did they?? Could it be a different basis at the time of deed?

When one person or entity buys real estate from another for a nominal amount (typically $1; I guess $10 is inflation), it's generally not a fair market value purchase. You need to look at the underlying transaction to determine what's really going on. In this case, it's most likely a gift of the house by the parents to the taxpayer. Thus you need to look at the rules for basis in the case of a gift in order to determine the taxpayer's basis.

[Burke]

Gary is right. It IS his house, legally. But his basis in it is the "donor's" basis since the purchase for less than FMV would be considered a gift.

[MilTaxEA]

Wouldn't it be the donor's basis plus $10? You can't forget about that $10.

[Burke]

Absolutely!

[bekzm]

Thanks

Thanks for all the in put. Now for some homework