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In 1998, our parents moved into a smaller home and shortly thereafter, signed the home over to we 3 children (we're all in our 40's). The home was purchased for ~$78,000 in 1998. There was no mortgage
In 2008, my mom, now a widow, moved from this home into a senior living center and we sold the home for ~$95,000. What is the tax liability now for my 2 sisters and I? What form should we be receiving regarding this sale? And would any gain be done using SCH D?
Thanks much
When your parents signed the house over to you, that constituted a sale. If you paid nothing for this property, then your parents may have owed gift taxes on it.
If you did pay for it, then that becomes your cost basis. But since you didn't live there, its an investment property. If your parents didn't pay rent, then you may have gifted them that a fair rental.
Bottomline here, is you may have created a large mess, if this wasn't handled properly in the first place. Which means you need a competent professional tax preparer to get you out of the mess.
It may not be all that bad...
The cost basis to you and your siblings is the original cost basis to your parents plus any improvements that have been made to the house. If no major improvements have been made, I would simply use the $78K figure. Your parents should have filed a gift tax form at that time - the gift itself wasn't taxable (unless the parents have maxed out their lifetime exclusion for gifts, which seesm unlikely). After that time while you mother was living there the market value of her free rent was a gift from the three of you to her, but based on the market value of the home it seems highly unlikely that the value of those gifts to her would have ever exceeded the annual gift exclusion limit of $12K per sibling. So I really don't see any gift tax issues here.
Assuming that neither you nor your siblings ever treated the home as rental property but simply as a second home for yourselves - since this house was not your primary residence you will each have to report the sale on Schedule D (Capital Gains). Each of you reports a sale of 1/3 share of a second home, at a sales price equal to 1/3 of the $95K (less any other costs that may lower this amount, such as commissions paid), and a cost basis of 1/3 of the adjusted basis. Each of you should add a note to the form saying that this was a jointly-owned property, and include the names and SS numbers of the other 2 siblings. See Pub 523 for more details on reporting house sales.
I agree with ebaines, that the exclusion would have meant that no tax was due, but I still think you needed to file the correct forms and claim the exclusion to offset.
However, I'm not so sure you can use the sales price that your parents paid as the cost basis.
Scott-
Thanks for the quick reply back; this is more complicated than I had hoped for.
We 3 children did not actually pay anything when the house was deeded over to us. I can check with my mom about their gift taxes, although this is not an expensive property (~$90K).
Also, when showing this on SCH D, I'm familiar with the sale of stock where you describe the sale as i.e. "100 shares Motorola"; would the description here just be "1/3 value of home"?
Lastly, one of my sisters said she might just ignore it and not report anything at all on her taxes. I've warned her not to. How would the IRS know that she didn't report this sale?
What documents are provided to the IRS regarding the sale of this home? Do they receive a copy of the actual Settlement doc at closing?
Thanks again
At closing, the transfer of property is recorded. I believe the county regularly reports sales to the IRS.
OK, using the $78K figure, each child was gifted $26K. At the time, the annual exclusion was $10K. Which means that $20K ($10K each from mom and dad for each child) was subject to the annual exclusion. However, there is a lifetime exclusion that could take care of the other $6K each. But, as I said, I believe the forms have to be filed even if no actual tax was due.
You can, but only if the fair market value at the time the property was gifted to the siblings is at least as much as the parents' cost basis. If the FMV was lower, you have to use that figure as the new cost basis. So strictly speaking there should have been an appraisal at the time of the transfer to determine the FMV. Assuming there wasn't... unless the OP is aware of any factors that would have lowered the FMV after the parents bought it and before they transferred it (such as storm damage, flooded basement, fire, etc) I would say that since the OP stated that the home was gifted to the siblings "shortly after" the original purchase by the parents it is unlikely that the FMV was much different than the original purchase price.Quote:
Originally Posted by ScottGem
Yes - you can write "1/3 value of second home."Quote:
Originally Posted by jomass
As for your sister - I would warn her that you will be including her name and SS on your return as a joint owner. You're only talking about a $6K gain for each of you, or about$900 that will be due in taxes on the $32K or so that each of you got when you sold the house, so why chance having the IRS on your tail?
Thanks again. I Googled and read about Form1099-S "Proceeds from Real Estate Transaction". Shouldn't we be receiving this form noting date of x-action and proceeds? Copy A is provided to the IRS it says.
Yes - from whomever handled the closing when you sold the property. Depending where you live - this may be the Title Company, or the buyer's attorney, or maybe your attorney. Since there were 3 sellers, they may issue 3 separate 1099-S forms - one to each sibling with each showing 1/3 of the proceeds. If at the time of closing you and your siblings provided information on how you wanted the proceeds to be split up, this is they way it should be handled. But it would not be unusual for them to issue just a single 1099-S to one of the siblings using one SS number and showing the full amount of proceeds - it all depends on how you presented yourselves at the closing. My earlier statements about listing the other siblings on Schedule D is really only necessary if the 1099-S lists only 1 sibling as receiving all the proceeds.
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