My wife and brother-in-law inherited their late father’s house. He willed 50% to each. The house value at the time of his death was $244K (tax assessment). The house had an $86K mortgage, which was paid off out of the estate assets. My wife and I are very well off so she decided to “sell” her half to her brother (who is a bum) for $20K. My question is how do I list this on our taxes? As I see it she has a $102K loss ($244K/2-$20K). Maybe the best thing to do is not list anything?

Thanks

AtlantaTaxExpert

You must be VERY CAREFUL here.

Selling ANYTHING to a relative at a price well below market value will raise the IRS interest.

You CANNOT claim the loss. In fact, I would argue that she gave him a $102K GIFT, so a gift tax return is due. That is how I would advise handling this issue.

MukatA

The person who inherits money or property does not pay any tax. The cost basis of property inherited by your wife was 1/2 ($244k - $86K) that is 78K. If you sell this house to her brother for $20K, the $58K may be considered a gift. The annual gift tax exclusion to a person is $12K. So your wife may have to file gift tax return.

Filing gift tax return does not mean that she will pay gift tax. There is a life time exclusion of 1 million.

AtlantaTaxExpert

Well said, MukatA.

The Texas Tax Expert

The advice you have been given is not accurate. The basis is the FMV at the time of death and the mortgage has no bearing on that calculation.

Even if the selling price were legitimate, you clearly cannot deduct any loss, because of the related party context. There would be some basis adjustment in the future reflecting this disallowed loss.

Because the selling price is not (it would seem) legitimate, then you also may have a gift situation.

AtlantaTaxExpert

TTE:

Are you referring to the advice from me and MukatA, or their original post??

It seems to me that we have all said basically the same thing, meaning that they cannot claim a loss and that a gift tax return may be due.

However, I agree that MukatA's basis calculation is not accurate.

The Texas Tax Expert

Sorry ATE, my comment was directed at MukatA's post, which I thought you were endorsing.

No offense to MukatA but the information was incorrect.

AtlantaTaxExpert

No problem.

MukatA

I feel obliged, if someone finds an error in my postings.

If someone inherits a property with FMV at the date of death of $100,000 and the property has liabilities worth $100,000, then what will happen? Who will pay the liabilities?

AtlantaTaxExpert

Depends on what you mean by liabilities.

The mortgage is a liability, and it has NO BEARING on determining the basis and calculating the capital gains when the property is sold.

Liabilities that DO affect the basis are the costs of the sale, repairs made to make the house sellable, and capital improvements to the house.