Real Estate Tax Liability Question on transfer of property?

Question

Scenario: Sister Claudia in California purchased a home at $330,000 and gives title to sister Isabella AFTER 2 years. Sister Isabella then refinances home at 429,000, but now decides she wants to sell the same home at 490,000. What is Isabella's Tax Liability if any?

Answer 1

Isabella must live in and own the home for 2 years before she benefits from the Capital Gain exclusion.

Assuming she has not:

$490,000 Sale Price
($330,000) Basis (Gifts retain the giver's basis)
$160,000 Capital Gain

Expenses from the sale and any improvements can be added to the basis.

Answer 2

Sounds like a homework question.

My guess, Sister Isabella's tax liability is going to be the 490K - her basis in the house which is the FMV when she received the GIFT. (If Claudia truly "gifted" the house, then she would have paid the tax on it, not Isabella, no add'l liability there). The FMV at the time of the gift is arguable, if she refinanced it right then, she could probably use the bank's estimate of the value to argue before the IRS if questioned, which in this scenario sounds like the 429K (unless of course she did some type of cash out refinance or somehow refinanced for more then it was worth, which I don't know if it's possible). So, I say she has to pay tax on the 61K (unless she's lived there for more then 2 years, in which case, no tax).

Of course, I could be wrong.

Answer 3

I would think Isabella now has a new basis of 429 and her liability would be 490 less 429 = 61k.
Perhaps she may qualify for exclusion on sale of personal residence if she lived in it or buys another

Answer 4

I think the real question is whether a gift tax return was filed when the deed was transferred. Doesn't sound like it was, but that doesn't change the answer, which is what the first guy said. The second guy was drunk when he responded.