stepped-up basis

[dmj4]

I have a client that is splitting the sale of his mother's residence with his sister and his mother.

*Facts:
Mother is still alive
This is not a community property state
Mother's husband died years before the property was partially gifted to the children.

*My stand on this matter:
Mother and her husband paid $22,000 for the house.
That would be $11,000 each.
When her husband died, the FMV was $44,000 (very conservative).
The property sold for $160,000.

**Mother's basis on the father's date of death is her $11,000 and half of his $44,000 to equal $33,000. The mother then gifted it to the children (the basis would have went with it) she later needed it back, so they gifted it back to her (again the basis would have went with the gift) she then gifted it to them again and they sold it for the mother to be able to live in a nursing home (the basis would still be $33,000). All of these transfers took place on a $1 quit claim deed.

**Another EA is doing the taxes for the sister's portion and she is saying that we can't do a stepped-up basis. Due to the fact that we are only considering the mother's stepped-up basis, on the DOD of her husband and the transfers took place after this basis would have been increase, I don't see why we can't. She is having the daughter pay tax on the entire portion of her 1099 and only deducting the closing costs.

Each one of the children did receive a 1099S and so did the mother, she retained a portion (16%).

Technically, it was the mother's residence, she retained an interest and control of when it would sell, when she wanted it and when she quit claimed it to the children. She also continued to live there until she went to the nursing home. In my opinion, I think it could be an incomplete gift and all could be reported on the mother's return as sale of her residence. I would do more research regarding that matter before making that conclusion but I know that my client would not go for it because he does not want to believe that he can have his mother's basis in it. Because his sister's EA says no. I suspect that she gifted portions back to them to keep her sale dollars from being more than the rules allow for her expenses to be paid in the nursing home.

Let me know your thoughts.

Thanks!

[ChEAr$]

a taxing subject

So to make sure now, the brother is your client. And from what you say about mother
retaining 16%, that seems to indicate that each sibling owned 42% of the house.

Correct so far?

Therefore, seems that his sales proceeds is 42% of the 160,000 and his basis is 42%
of the 33,000 (yes, stepped up basis of course). And he gets 42% of closing costs.

Only thing you should or can worry about it your client, and not his sister.

[erchess]

Family Situation

You certainly should not worry about the EA who is doing the Sister's return. Every field has incompetent workers and even competent workers make errors.

As I think you meant to say, your client almost certainly wouldn't go along with putting the sale entirely on Mom's return. If one looked only at the tax returns, that might well be the way for the three to pay the lowest tax. However, I agree with your suspicion that the mother cannot afford to tell the nursing home that the sale of her home brought her more than a certain amount of money. The less you know about that situation, the better it may be for everyone concerned. One hopes that the family is getting good legal advice.

Did you say that your client does not want to claim the stepped up basis? Can you explain why he would not want to do that?

[dmj4]

My Client

I completed the return that way. Then he told his sister what I did and that it saved him money. She then went back to the her EA and she basically told her client (the sister) that I had lost my mind and that she could not take the stepped-up basis. It scared my client away from taking my advice.

When my client was there I showed him things from the internet that gave examples of stepped-up basis. I spent way too much valuable February time with him on this issue. When he was planning to use my figures he said, "If this return costs $200, it will be well worth it."

Thanks everyone, for letting me know that I have not lost my mind........yet! HA!

[Snaggletooth]

Not enough Basis

dmj4, you live in my state, and I see a very common problem.

Attorneys in our state are notorious for computing FMVs that are
ridiculously low. We have a $500,000 threshhold for estate tax,
and I have problems continually with heirs selling their property
after it has been appraised ridiculously low.

Over the last few years I have seen several by ONE attorney.
He is a State Representative. The big problem? After the heirs
sell the property, there is no support for a higher valuation as of
the date of death, and more capital gains must be reported.

I think this may have happened in your client's case. Unless the
father died a LONG LONG time ago, it seems inconceivable that
a $160,000 piece of property was worth only $44,000 as of his
date of death. Was this value recorded anywhere and are you
locked into it? If not, you may be able to reduce the capital gains
your client's family is confronted with.

I don't know what to do about the other EA. You are correct about
a "half" stepped-up basis. Sounds like your client is not willing to
rock the boat. You might suggest that both your client and his
sister seek an independent third opinion from a CPA or knowledgeable
tax practitioner.

I also believe you must determine whether this is a "completed" gift.
A fractional share can still be a completed gift, so long as it is a pure
gift at the time of donation. In my opinion, as long as Momma retained
the right to live there, there never was a gift, and Momma would need
to report the sale.

If she gave fractional shares to various family members with no retentive
rights and no further strings, the gift is complete, and each owner must
report his (her) share of capital gains.

I think you are on the right track. The only thing that bothers me is
1)not enough FMV as of Daddy's death.
2)the E A who is spewing forth bad information.

Regards, Ron J.

[dmj4]

Snag

I agree that the $44,000 is very low. My client says that at one point he thinks he remembers somethingbeing said about either $49,000 or $79,000, he is going with a figure lower than the lowest figure. Keep in mind, I can't convince him that he can use any basis, let alone more than his share of the $44,000. The other EA did not even use the cost to the mother and her husband, let alone a step-up on his date of his death.

If he does decide to go with the stepped-up basis I am going to have him try to find a value, even the property tax statement will probably show more than $44,000 when the husband died.

I also agree that this should probably have been sold in the mother's name. The fact is, that it was not and he has a 1099S. If he were to get audited because of "my stepped-up basis", I would definitely argue that case and he could get more money back.

It is possible that the other EA does not want to use a basis because they have not brought her any documentation regarding how much was actually paid for the house. My Dad built a house in 1967 for $19,000 so I feel that his figure of $22,000 is right on target. All he has is his memory to back it up at this point.

We really have the same problem with attorneys, too. I had a client call the other day saying they had an appraisal done and the attorney was still going to use the property tax statement for the TN INH. The appraisal was more than $100,000 above the property tax statement. I told him to call that attorney back and tell him he wanted to use the appraised value when that form is filed. He said he definitely would do that.

The attorneys must be thinking that the value could be challenged if there was in fact an audit. The true FMV would be what it was really worth on the DOD. I tell my clients that I see no point in having to challenge anything, especially when there are many family members involved and one of them signed the return agreeing with the low value before they sent it to the state. It's funny because this is one of my pet peeves with attorneys. They should not be doing these returns if they can't do better than using a propety tax statement. They also do not have the client value the cattle, equipment or timber. I think the attorneys feel it is just a hurdle to get past probate court.

Thanks for listening. This has just been a time consuming, frustrating situation. Way too much time and too little money.