Gifted or Inherited Property Tax Implications when Sold?

[Brenda's Taxes]

A mother purchased a coop in 1984 that was worth 515 shares that cost $110/share or $56,600. In 1995, she added her 2 daughters to the deed (and they never lived there) although they are saying they have no way to know what the value of the property was when they were added. Mom died in February 2017 (after living there since 1984) and the daughters inherited the mother's 1/3 ownership and they sold the coop for $215,000 in June 2017. My client, one of the daughters, is saying the real estate attorney and financial planner agreed that the valuation when the daughters were added in 1995 would be based on that the coop appreciated $4,800/year based on what it sold for in 2017, making the value in 1995 = $110,000 and that the difference in what it sold for $215,000 and the value in 1995 $110,000 = $105,000 gain that should be split three ways. But I'm thinking the gain should be split 50/50 with the daughters because they inherited the other third. Also, is there any step-up in basis for the mother's one-third interest at the time of her death in February 2017? Thank you in advance for any insight you can give me on this!

[taxea]

you need an appraisal at time of mom's death. Using the appraised amount each daughter would get a bump up of 50% of 1/3 of the appraised value.

[TaxGuyBill]

The value when the daughter's were added to the title has nothing to do with anything.

I'm unfamiliar with what you mean by "coop". Is this a home that she bought?

After being on put on the title, did the daughter's ever have any use or benefit of this coop (you already said they never lived there)?


The client may need to consult an Estate Attorney, but if the daughters never had any benefit or use of the home, it seems like an Implied Life Estate to me. If that is the case, there is a full step-up in Basis on the Date of Death.

[Brenda's Taxes]

A Coop is a cooperative. The mother bought an apartment in the cooperative. I thought that if the mother gifted 1/3 ownership when she added her daughters to the deed, that gifts transfer the original cost to the new owner so at the time the mother purchased it in 1984, it cost $56,650 and when she added her girls in 1995, you divide her basis by 3 and they each now have a basis of $18,883. What I'm not sure about is if the mother prepared gift tax returns in 1995 or how the mother's 1/3 gain on the sale would be taxed since her daughters inheritied that portion as well, especially if a gift tax return was never completed. I think because the daughters were on the deed with the mother, you can't step up the basis as of the date of death. Am I wrong?

[JON]

Life Estate

Can actions create a Life Estate or do you need something more formal? Seems to me transfers of ownership can happen with residences by adding names to titles?

[Burke]

Agree with the fact that this qualifies as an Implied Life Estate, which is treated as an incomplete gift since the daughters did not contribute any monies (I assume) for their names being put on the deed, they never had personal use of the property after that date, and the Mother continued to live in and occupy the property. Also, I assume Mother continued to pay all upkeep, taxes, etc. They get a full step-up at Mother's death due to this reason. Had it been sold while she was still living, the answer would be different. It's value at time of gift has nothing to do with anything as far as calculation of gain, and I am surprised real estate attorney and financial planner think so.

[Brenda's Taxes]

Thanks for your responses! Burke, I am not familiar with an Implied Life Estate or it being treated as an incomplete gift. I thought that adding another person to the deed of your home would be considered a completed gift which means the basis is transferred to the new owner. Anyway, does it matter if the daughters did spend some time in the summer at the home with their mother? I'm not convinced they would get a step-up in basis at the time of their mother's death.

[taxmom34]

I agree with Burke totally. same situation happened to my sister two years ago. the son inherited the property with step up basis.

[Burke]

Thanks for your responses! Burke, I am not familiar with an Implied Life Estate or it being treated as an incomplete gift. I thought that adding another person to the deed of your home would be considered a completed gift which means the basis is transferred to the new owner. Anyway, does it matter if the daughters did spend some time in the summer at the home with their mother? I'm not convinced they would get a step-up in basis at the time of their mother's death.

Adding another person to the deed without consideration (monies) is a gift. However, if the original owner continued to live in the home and enjoy all incidents of ownership as before, as well as paying all the expenses, it is treated as an incomplete gift and the asset would be subject to Estate tax when the original owner died. Therefore, it gets a stepped-up basis. Visiting their Mother would not be considered personal use of the home for the daughters. If it had been sold before the Mother died, any gain would be split between the owners named on the deed using original owner's basis for calculation, not basis at time of gift.

[Michele]

Implied Life Estate

I have a similar situation right now where the Implied Life Estate may apply. The difference to the story is that the parent did not leave their name on the home but signed it over to the child completely in 2003. The parent continued to live in the home and pay all the expenses as if no transfer of ownership occurred. Parent passed away in 2017 and the home was sold. Would the Implied Life Estate apply and their basis be the FMV on date of death? Or would they use the donors basis when they were added to the property in 2003?

Thank you,
Michele

[Burke]

The concept is the same. It is an incomplete gift if she continued to use and enjoy the premises as well as pay for the upkeep. Result is inclusion in estate of donor and full-stepped up basis at donor's death. (She was taking the risk that the child, or the child's heirs if child died, could evict her from the home and sell it while she was still living). Lots of these transactions took place in prior years to avoid Medicaid rules about paying for long-term care. There are much better ways to protect assets these days.