Home sale forced by Medicaid rules

[origun]

My client was deeded a home by elderly mother in 2005 but mother continued to live there for over a year. Then mother had to go to a nursing home in early 2007. My client was told he had to pay for first year in nursing home because transfer had been within 36 months of her application for Medicaid--which he was unable to do. Therefore the home was sold in mid-2007 and my client received half of the proceeds, the rest going to mother to pay for her care. He received a 1099-S for his gross proceeds from Title Company. How is his income treated--a capital gain with selling expenses as his basis on Schedule D--or as ordinary income?

[Gretel]

I think the home should have been sold in mom's name, taking the Sec.121 exclusion. It appears she had an applied life estate, or maybe there was a life estate recorded on the deed?

[origun]

But it wasn't sold in mother's name! Client has a 1099-S for about $100k. The deed had been recorded in son's name in 2005. I don't know much of anything about Medicaid rules but he was told by a lawyer that it had to be sold and proceeds divided. At the time he was told it would be capital gains income but his first tax pro of the tax season said it was ordinary income, line 21. Ouch!

[Y2KEA]

Mom gifted the house to son to evade medicade rules. Mom got caught. I bet Mom didn't file a 709.
Son's basis is Mom's adjusted basis. If the house was gifted in 2005 & sold in 2007, then LTCG for son.
"Tax pro" doesn't know what he is talking about or perhaps son gave tax pro a different song & dance.

[S T]

Would It be

Mom gifted house to son in 2005, Mom should have filed a gift tax return,

So many scenarios can follow with the sale of the home in 2007, so you would probably have to check county records, obtain escrow statements, etc.

Assuming deed was transferred to Son in 2005, Son owns home as his personal residence and lives in home for the 2 years, so Son should be able to claim the S 121 exclusion.using Mom's basis in property. The actual dates have not been posted.

Maybe son did not file the correct papers at the escrow office on closing, or maybe the son did not actually own the home for the full 2 years.

There are papers that have to be signed and completed at Escrow Closing. Those could have been completed in error/wrong.

Or maybe the title on the deed never transferred, and all was done with power of attorney on Mom, and son wrote in his name and information. Escrow Offices have been known to make mistakes as well.

The above are a few that I can think of, so it would seem you would be on a document seeking mission to piece all together.

Sandy

[FEDUKE404]

Agreed

Mom gifted the house to son to evade medicade rules. Mom got caught. I bet Mom didn't file a 709.
Son's basis is Mom's adjusted basis. If the house was gifted in 2005 & sold in 2007, then LTCG for son.
"Tax pro" doesn't know what he is talking about or perhaps son gave tax pro a different song & dance.

I think this is probably the most likely scenario. Let's see how house-poor we can become so those govt benefits will come our way.

Happens all the time....

"She does not own a house" for Medicaid but "it's not my house" for the IRS bill. The guy should be thankful he can go the LT cap gain route, but that "gift" cost basis, versus the inherited cost basis, may clean his clock.

True story: "Dad" transferred title to five children prior to impending death, went into care facility, and home was sold. One of those children sought professional tax help, did it "the right way" for determining her portion of the taxable gain. The other children reported basis as stepped up due to value "inherited" at death. Much turmoil in the family, especially when "Dad" recovered and wanted to know what the heck happened to his house!

FE

[JohnH]

Would like to have seen his letter to IRS

"The tax benefits claimed due to the rumors of my impending death have been greatly exaggerated."

[Burke]

My client was deeded a home by elderly mother in 2005 but mother continued to live there for over a year. Then mother had to go to a nursing home in early 2007. My client was told he had to pay for first year in nursing home because transfer had been within 36 months of her application for Medicaid--which he was unable to do. Therefore the home was sold in mid-2007 and my client received half of the proceeds, the rest going to mother to pay for her care. He received a 1099-S for his gross proceeds from Title Company. How is his income treated--a capital gain with selling expenses as his basis on Schedule D--or as ordinary income?

Medicare rules are one thing. Tax law is another. See the rules for sale of a home with a life estate. (Life Estates can be implied, even if not written in the deed, per past TC rulings). Both have gain since the house was sold while the mother was still living. Since it was her personal residence and she meets the rules, she can exclude her portion under Sect 121. The son will have capital gain, but must figure it based on the tables in IRC 7520 using her age and the rate for the month of sale. You can access these also on the IRS website. Then use Pub 1457, Table S for the percentage rate and calculate the gain for both parties (life estate and remaindermen). As an aside, had the house not been sold until after her death, it would have been includible in her estate as it was an incomplete gift, and therefore received stepped-up basis to the son.

[origun]

Thank you all for your help. My client knows he has capital gain--a gift, not inherited stepped-up basis and will have a significant tax liability. However, as long as it is CG, not ordinary income (as told by another tax preparer) it will be within his expectations. I will research the info sent by Burke and appreciate his/her help.

[Kram BergGold]

Burke is correct with one caveat

In order to argue an implied life estate the mother had to make the payments to keep up the house after her son's name was put on the deed. If the son paid for the taxes, insurance etc then the Mom made a gift and the son is responsible for the gain..

[origun]

House was owned outright by mother. When transferred in 2005, son paid house expenses but didn't live in it. The percent he got at time of sale was determined by a lawyer and Medicaid rules (a little over 50%) and he was told at the time of sale that there would be a capital gain and major tax consequences. So...I'm concluding that it is a long-term gain to be treated as a gift with mother's basis. Basis is very small--purchased in 1960's but house originally owned jointly so mother got a bit of a step-up on husband's half when he died in 1970s.Amazingly, we have these records. Son paid out a few thousand for fixing up to sell which I have added to basis along with expenses of sale such as commissions (all prorated according to his share of the sale proceeds). His gain is significant--but not ordinary income on line 21 for total amount on 1099-S as he was originally told. Is there anything wrong with my reasoning?

[Burke]

Gift rules state that the recipient takes the donor's basis and holding period. So it's long term.