Here's a new wrinkle: parent sold 80% interest in her home to son for $75K, while retaining a life estate interest in the portion sold. Should that have been treated as a sale by the parent in that year? Of course, if so, it would have qualified for 121 exclusion anyway and not have been a taxable event. I have seen a lot of gifted interests, but not a sale. Problem is, now house has been sold in 2016 to a third party and parent is still living, gone to nursing home, so it looks like a capital gain to the son to me for the 80% which was sold to him. Had the sale been after she died, all would have gone away. He thinks he has a big loss because of the cash received after the mortgage was paid off. Mortgage was not held by the son -- it was with a bank.
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Dunno Burke
Really strange one - can you give us more information, such as:
Was the "sale" amount less than FMV by more than $14,000?
Did the son live in the home as his primary resident?
It would appear if the sale to a third party occurred, it would still be subject to the control of Mom. Not sure how to handle this either. -
He gave his mother $75K
I think you need to go back to the sale document. Was it recorded? Did the bank know of the sale? Who was the legal owner?
"He thinks he has a big loss because of the cash received after the mortgage was paid off. Mortgage was not held by the son -- it was with a bank."
Just because your client gave his mother $75K doesn't mean he actually bought anything. You really need to dig into the legal details.Comment
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most people seem to think that the mortgage payoff is part of the gain or loss in the sale of a residence.Comment
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Exactly. That's what he thought. The original transfer of ownership was recorded through a deed drawn up by a lawyer in which it states "for consideration of $XXXX, 80% of ownership is transferred to (son) for which (mother) retains a life estate..." And I think it was at FMV. Whether the bank knew about this, I need to check. HUD-1 shows the son's name only on the recent sale document. I suspect this was done to circumvent certain Medicaid requirements, that's usually why these things come up. Would it change the situation which occurs when an interest is gifted with a life estate retained? If house is not sold until mother dies, it gets included in her estate and all is stepped up. If sold before that, interest is split between mother and son - his is capital gain, hers is also, but 121 applies. He never lived in the home.Comment
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If the son owned 80%, why wasn't the mother also included. So far, it sounds as if only the son's 80% was sold and the mother still owns 20%.Originally posted by Burke View Post
I also don't understand why you keep bringing up selling after the mother's death. 1) that's not what happened, and 2) only the mother's 20% would be stepped up. The son's basis in his 80% would still be $75K.Comment
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No, that is not correct. When an interest is transferred to another party with a life estate retained by the owner, it is considered an incomplete gift under the law. That means it remains an asset of the original owner and is included in the original owner's estate in full at her death. At that time, it gets a full stepped-up basis and if sold, it is generally not at a profit. If sold before that, a split result occurs. Of course, the entire house was sold, not just my client's percentage. Hence it is taxable to each of the parties. Only difference is, the original owner meets the 2-out-of-5 year rule and qualifies for Section 121 exclusion on their 20%. Although only the son's name is on the HUD-1, these things are drawn up by the title companies and often do not reflect the correct name. I have seen gifted properties where only the original owner's name is on the HUD-1 and vice-versa. It details the financial disbursements but the deed controls ownership.Last edited by Burke; 03-15-2017, 12:18 PM.Comment
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