I live in California. My two sisters and I are beneficiaries in our step-mother's will which leaves us the family home, as well as her bank accounts, upon her death. There has been some talk about selling the home now and putting the proceeds into her bank account. She is in an assisted living home, and hasn't occupied the house for two years. What are the tax consequences of selling the home now? Does she qualify for the $250,000 tax break, even though she hasn't been living in the home? Also, if we don't sell the house, but later inherit it, what is the inheritance tax? Will it make more sense, tax-wise, to keep the house and sell it after we inherit it? And, finally, should our step-mother consider doing a quit-claim on the property and turning it over to us now? Sorry this is so long. Any help would be greatly appreciated.

Not sure about the state, but for federal taxes the estate has to exceed $2 mil. The house will be valued at the time of death and that will be the cost basis. If you sell it after her death, then whatever profit you make over the cost basis will be capital gains. So it would probably be better if you can sell it now and invest the proceeds. Not sure about whether she can take the exclusion though. That would be a close call.

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Originally Posted by ScottGem

Not sure about the state, but for federal taxes the estate has to exceed $2 mil. The house will be valued at the time of death and that will be the cost basis. If you sell it after her death, then whatever profit you make over the cost basis will be captial gains. So it would probably be better if you can sell it now and invest the proceeds. Not sure about whether she can take the exclusion though. That would be a close call.

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I would disagree. Having just been through this with my wife's parents estate, I think you would be better off to wait to sell the house until after you inherit. As ScottGem said, inheritance (estate) taxes are paid on the total value of the estate minus the $2 million exclusion. This would be the same regardless of whether the estate consists of the house & her bank accts, or bank accts & other investments.

If you sell the house now your step-mother, still living would be liable for capitol gainsbased on sale-price today minus the cost-basis of whatever she paid for the house way back when and any deductible inprovements. Quit-claim or not, there will still be significant capitol gains to contend with. Even if she qualified for the $250k exclusion. :(

However, if you wait until she is deceased, the cost basis is set at current market value of the date she passes and any capitol gains are appreciation from that point on. This bypasses a large capitol gains liability. :D

If you need the money now to pay for the assisted living, you would be better off to rent out the house or take out a loan against the value of the house.

Wayne makes some good points, but he also makes a lot of assumptions. The main assumption is that your mom has owned the house for a long time so that it has appreciated greatly. If this is the case then it may be better to sell it afterwards. But your mom is in a low tax bracket and the house may not be subject to a large capital gains.

I do indeed make the assumption that the house has appreciated greatly, but I base that assumption on some research and personal experience.

The median home price in CA major metro areas is just over $500k and has increased anywhere from 4% to 23% in the last 3 yrs (more in the last 5 yrs). Considering that the house has been vacant for two years and it's the 'family-home', I consider it a good bet that the property in question has some significant appreciation that could be subject to capital gains if sold now.

BTW - I don't know if it would qualify for the $250k exclusion or not. That would be a question for a tax lawyer.

Regardless, the best advice is to run the numbers yourself and compare.