[RIcarolyn]

My mom quit deeded her property to me before she passed away. I sold the property for $65,000 shortly after she passed away in February. She bought the home in 1985 for $55,000. My question is do I have to claim the $65,000 on my income tax? Also, I will be splitting the money with my 3 siblings. As I am only keeping 1/4 of the money, do I have to claim all of it? Do they have to claim any?

[AtlantaTaxExpert]

Because she gifted the property to you, you and your siblings will report the sale on Schedule D As a long-term capital gain on a pro-rated basis, which means you pay taxes at a capital gains rate of at most 15%, and probably at 5%.

You pay on $2,500.

[ebaines]

You pay on $2,500.

I think the OP pays on a gain of $10,000. He is the owner of the property, not his siblings, so he pays all the capital gain tax. If he decides to split the proceeds with his siblings then he is making a gift of $65000/4 = $16,250 to each of the three. So now he has a gift tax issue, and will have to file a gift tax return (though it's unlikely that any taxes are due on these gifts).

[AtlantaTaxExpert]

Ebaines is correct, given that the property was deeded only to the OP.

GOOD CATCH!

[ebaines]

Two additional points:

1. I should have pointed out that the gift tax filing issue can be avoided by splitting the payments to each of the three siblings across two calendar years. For example send them each $10,000 in one calendar year and the balance in the following year. This way you avoid making a gift to any one individual of more than $13,000, and hence avoid any gift tax issues completely.

2. To make it fair for all the amount to split should be equal to the proceeds from the sale minus the income taxes paid. If we assume that the income tax on the $10K capital gain is $2000, then that leaves $63,000 to split four ways, or $15,750 each. This way all four siblings come out with equal benefit.

[ScottGem]

There is a problem here is that this is NOT inherited property. Inherited property would have been deeded AFTER the owner died.

So the question is when the property was deeded to you did you pay anything? If not, then the property was a gift to you. Not sure what the tax basis would have been in that case.

[ebaines]

Not sure what the tax basis would have been in that case.

Most likely the OP's tax basis is the same as what his mother's cost basis was at the time of the gift (maybe I'm reading too much into the OP's question but I assumed he knows that - based on the fact that he told us what her cost basis was). An exception would be if the fair market value of the property at the time of the gift was less than her cost basis - then it gets a little complicated.

[ScottGem]

So, if the value at the time of the gift was $60K, then that is the cost basis and they only have to pay tax on the $5K profit, but the mother (or her estate) was responsible for gift taxes based on the $60K?

[ebaines]

So, if the value at the time of the gift was $60K, then that is the cost basis and they only have to pay tax on the $5K profit, but the mother (or her estate) was responsible for gift taxes based on the $60K?

No. The property was gifted to the OP before the mother's death, so it is NOT and inheritance. If she originally purchased the house for $55K, and the fair market value at the time of the gift was $60K, then his cost basis is the same as what her basis used to be, or $55K. Where it gets complicated is if the FMV at the time of the gift was less than her cost basis - the rules then depend on whether he had a gain or loss from either the original cost basis or the FMV at the time of the gift. I won't bother listing those rules out as they don't appear to apply in this case.

The cost basis for a gift is unlike the basis for an inheritance - if she had maintained ownership until she died and the OP had inherited the property then the cost basis would have been "stepped up" to the FMV at the time of her death. Hence it's better tax-wise to inherit appreciated property than to be given it.

[ScottGem]

Thanks for clarifying. I wasn't sure if a gift had to be valued at the time of its giving.