Capital Gains basis

[auntym]

What whould be the basis to pay capital gains tax on in the following situatuon:

House purchased by my mother in 1984. Immediately given to 3 children, deed put in their name. Purchase price at that time 192,000.00 My mother deceased 2000.Father deceased 2001. My brother living in house until present time. 5 years ago my sister and I purchased my brothers share for 110,000.00 House now belongs to my sister and myself. Neither she or I live in this residence. We are now selling the house for 330,000.00 What would be the amount as half owner that I would compute taxable gains tax on?

Auntym

[BOB W]

Half

$46,000 for your half of the reportable gain. $119,000 is your half basis.

[veritas]

I'm going with a total basis of 119,000 for both of you assuming you each got 1/3 at the time of the gift and you both put in 55,000 to purchase your brother's interest.

[Bill Tubbs]

Inherited?

While I see how Bob & Veritas arrived at their answer (which would be a conservative answer), I wonder if there are more facts that could change the answer... When house was gifted to children in 1984 -- did parents continue to live in the house with a life estate? If so, then the 3 children may not have actually had a gift in 1984, but rather an inheritance in 2001. Then you would take the FMV in 2001 divide by 3 to arrive at each of the 3 children's basis; and add $55,000 for your share of buying out the brother (assuming you and sister each paid $55,000 for a total of $110,000).

Bill

[Kram BergGold]

Improvements?

Assuming no life estate, do not forget to add the the cost of improvements to the $238,000 basis.

[OldJack]

Its all about mother.

From the post details it would appear that only Mother bought the house and retained a life estate. On mother's death in 2000 the kids inherited the house at FMV. Father doesn't have a life estate and has nothing to do with it except the fact that he was living in it free of rent.

Therefore, the posters cost basis would be the inherited FMV at mothers 2000 death divided by 3, plus ½ the price paid to purchase brothers share.

On IRS audit an issue might be if this was rental property with depreciation allowable reducing basis and/or gifts were made, since father and brother lived in the property tax-free. Probably not a red flag.

[BOB W]

Life Estate

I did not read anything about a Life Estate in the original post. Can a Life Estate be created just by gift and remaining in the home, I don't think so.

[OldJack]

I did not read anything about a Life Estate in the original post. Can a Life Estate be created just by gift and remaining in the home, I don't think so.

For tax purposes with parent I don't believe a life estate has to be in writing. A gift of home with mother retaining residency is an understood life estate between parties although could be questioned legally. But then, that would bring about the fact that mother's gift was not a completed gift regardless of the title so mother has a life estate.

In discussing a decedent for estate tax purposes in 2006 RIA Handbook, ¶5005 :

The decedent need not have a legally enforceable right, but there must be an agreement, either expressed or implied, that the decedent will retain the benefit. [¶R-2422; TD ¶764,003]

[BOB W]

Old Jack,.......

... very interesting. Life Estate not reduced to paper. Nice find, I will use that in the future.

Auntym, are you still out there........................