Home Purchase

[pmedders]

Client set up agreement with her mother in April of 1999 to purchase mother's house. Client put $50,000 down and paid $1300 per month (no interest) for thirteen months and also set up agreement to pay two brothers $80,000 each for their portion of house when mother died. Mother died in March 2000 and client refi'd in October 2000 to pay off brothers. Client's husband died in May 2000.

My question is if client purchased her portion of house from mother in April 1999, would she have a step up basis for her/and her husband's (community state) portion of house when husband died? And then would I add the $160,000 for two brothers' portion of home? Client sold home in 2005 and trying to determine basis.

[Bees Knees]

Your client bought the house in April of 1999. Nobody inherited anything. There is no step up of basis.

The daughter may have had an agreement with the mother to let her live there for life, but the purchase was still April of 1999, long before the mother's death.

What you have is a combination installment sale and gifting with a no interest loan, with portions of the installment payments not due until later (the brother's portion).

[pmedders]

Step Up Basis

Wouldn't client have step up basis when her husband died in May of 2000?

[Bill Tubbs]

Step-up? Yep.

It also sounds like you are trying to say that your client only paid her mom 1/3 the value of the house, and then she paid 1/3 each to each brother? It all depends on HOW EXACTLY the transaction went down. If it was titled just in mom's name before the sale and then just in the client's name after the sale, I would figure that daughter paid 1/3rd and received the other 2/3rds value of the home as a gift. Then when mom died, client gave each brother $80,000. But, if client was obligated as part of the purchase agreement to pay each brother $80,000, it could be viewed as client purchased the property, paying 1/3rd to mom, then 2/3rds to her designees -- such that the total cash client paid would then be her basis. DEPENDING ON HOW EXACTLY the transaction was structured.

But, is that all a moot anyhow? Presuming client was the sole owner of the property (her brothers weren't on the title) in October 2000 when her husband died, according to community property laws she may very well have received a step-up in basis to FMV at Husand's DOD (Oct 2000). You don't say when the $80k was paid to each brother, but I would have a hard time adding that $80k (x2) to the FMV at DOD (Oct 2000).

So, I would say basis = FMV at DOD (Oct 2000).

Bill

[Bees Knees]

I'm sorry...

I was only thinking about the step-up issue when the mother died. No step up at that time.

But there is a step up of basis when the husband died, since this is a community property state.

TTB, page 21-28 under Community property says “the decedent’s [husband’s] share of community property is included on Form 706 and receives step up of basis. The surviving spouse’s one-half share of community property also receives stepped-up basis if at least one-half of the whole community interest is includible on Form 706. The interest must be defined as a community interest under state law. Joint tenancies in community property states may not qualify.”

You may need to find out if the property was put in joint tenancy with the husband when the wife bought the property from the mother.

As to the basis issue with paying the brothers off, I agree with what Bill said.

[pmedders]

Husband's

name was not on deed; the mother and client's husband's deaths were so close that wife had not changed anything over. When client began agreement with her mother, the client's name was added to deed along with her mother's name. Then mother died in March of 2000, which would then make home 100% of daughther's (I think, but unsure because of the agreement to pay her brothers off and she did not pay brothers off until October 2000). Being she did not pay brothers off until October of 2000, would the house be considered owned by all three siblings after the death of the mother until the payoff; and if that is the case, when the client's husband died in May of 2000, then there is only a stepped up basis of client's 1/3 portion? Or being it was her mother and client's name only on deed, would she receive a full stepped up basis with the death of her husband in May of 2000??

[Bees Knees]

If the mothers name and the daughters name were both on the deed, it appears this is a joint tenancy issue with right of survivorship, with gifting going on between daughter, mother, and brothers.

A normal installment sale would not have both the buyer and seller's name on the deed as joint tenants. The seller's name is on the deed until the buyer pays off the contract.

So now I think you could claim a step-up of basis at the mothers death, and again at the husband's death. The $80 grand to the brothers as gifts since mother wanted it that way. I would give it full basis step up at husband's death due to community property rules, but I think I would shy away from adding the $80,000 on top of FMV step up when the brother's were paid off.

[pmedders]

Thanks Bees Knees!

Much appreciated. Hope you are having a wonderful Easter!