calculate capital gains on house sale?

Question

1993 Parent takes principle residence and divides as follows:
1/3 parent
1/3 daughter
1/3 son

All three are tenants in common and house is worth 160,000
709 filed with irs


2006 Day before parent dies, parent share divided between daughter and son still tenants in common.

Daughter has lived in house the entire time therefore house is principle residence.

Son has not lived in house since 1970.


Assuming house sells in 2007 for 450,000 what do son and daughter owe in terms of capital gains ?

basis of house is 150,000

Answer 1

All of what has been said are valid observations, however I get the idea you want to know what this is going to cost each of you. In the worst case the son would owe something like $22.500 and the daughter nearer to $7,500. Any of the adjustments that have been mentioned would tend to reduce those amounts downward. The most important point here for the readers is that this question should have been asked in 2006 before the parents death and there would likely be no Federal income tax to be paid by any one. And it would not have cost $30,000 to ask a professional tax person.

Answer 2

Ignoring the costs of the sale, and the gift tax paid, which would reduce the gain a bit, the gain on the house is $300,000. At the time of the sale, you and your brother each own 1/2 of the house, so each of you has a $150,000 gain.

From your question, you did not inherit the house, since the property was divided by your parent before death. As noted in another answer, this was not a tax benefit to you, but not a huge benefit was lost because 2/3 of the house was already gifted to you and your brother since 1993.

Your brother's gain is $150,000 capital gain taxed at a maximum of 15%, or about $22,500.

Your gain is more complicated. You lived in and owned 1/3 of the house for at least two of the five years preceding the sale. Therefore your excludible capital gain is $100,000. The remaining $50,000 is not excludible because you did not own 1/2 of the house for 2 of the 5 years preceding the sale. You will have a taxable capital gain of $50,000, and pay a maximum of $7,500 in tax.

Note about gift tax: If a gift tax was paid at the time of the original and subsequent gifts, that tax is added to the original $150,000 basis of the house. This is because the FMV of the house at the time of the gift is more than the donor's adjusted basis in the house. This will reduce the gain, as will the costs of the sale.

Note about basis: I have used the figure of $150,000 you gave, but you should review the rules for determining basis to see if this basis can in fact be increased. For example, suppose the basis at the time of the first gift was $150,000. Then between the first gift and the second gift, $60,000 of improvements were made to the house. The basis at the time of the second gift is $210,000. This reduces the gain on the sale to $240,000. Your brother pays capital gains on his $120,000 gain. For you, $80,000 is excludible and $40,000 is capital gain.

Answer 3

Your first step is to determine the basis of the house in the hands of the son and daughter. It's important to understand that "gifts" recieve a carry over basis (i.e. the basis in the hands of the giftor is transfered to the giftee) while inheritances are attributed a stepped-up basis (i.e. the basis in the hands of the beneficiary is the FMV of the inherited property).

The basis related to the 1/3 portion gifted to the son and daughter in 1993 is the parent's "basis" in the house at the time of the gift. Thus, after the 1993 gift - the son, daughter and parent would each own 1/3 of the house and the basis for each portion would be 1/3 of the parent's original purchase price plus improvements up until the time of the gift (i.e. the parent's basis at 1993) plus any gift taxes paid on the '93 gift.

Now, it sounds like the final 1/3 portion of the house was inherited by the children in 2006. If that's the case, the basis of that portion (i.e. 1/6 of the house) in the hands of each child is 1/6 of the FMV of the house at the time of death (2006).

Thus, each child now owns 50% of the property with a basis equal to the parent's original basis plus improvements (and any gift taxes paid) for the first 1/3 portion and a basis equal to 1/6 of the FMV in 2006 for the final 1/6 portion.

Now, assuming the daughter has lived in the house for 2 of the past 5 years she can exempt a portion of the gain from her taxes. The gain exemption is $500,000 if MFJ and $250,000 if single. Thus, her entire gain may be exempt from taxes.

It appears that the son must pay tax on his entire gain because the house is not considered his primary residence.

I hope that makes sense.

Answer 4

Not enough information to say. Need to know the parent's basis in the home. And need to know how much Gift Tax was paid in 1993.

I will say this, though. The parent committed a serious tax error in gifting the home to the children. Had the parent not done that but left it in the will, there would have been little to no tax since the children would have received the stepped-up basis on the parent's death. As it is, they only receive the pass-through basis of the parent's original cost basis, adjusted for the Gift Tax actually paid. The parent also had to pay the Gift Tax which would have been avoided had it been left to the children by bequest. The parent may have used the lifetime exclusion to avoid the Gift Tax in 1993, but that would have reduced the exemption amount on the Estate Tax Return dollar-for-dollar and if the estate was large enough may have triggered Estate Taxes.

Addendum: OK, got the basis. Still need to know the Gift Tax paid in 1993, if any. And need to know of any improvements since then.

Answer 5

in the experience that your mom has offered the homestead extra beneficial than 3 years returned, you will incur LTCGs. Her purchase value would be your purchase value. you should take income of indexation and pay LTCG Tax @ 20%. HMT