[kokocorn]

A while back my mother changed the deed to her house to put all 4 kids as owners. Lawyer put provision on there that she pay us $1 a month and be allowed to live there until her death. She later died and my single brother continued to live there. He died last year. My sisters and I sold house. When doing taxes this year, one sister said her tax preparer calculated capital gains tax by subtracting house sale minus value of house at time our names went on deed.

My other sister said her tax preparer said we may not have to pay any capital gains tax because of that $1 per month thing. I don't understand. Why would my mom having to pay us $1 per month (which of course she never did) allow us to not have to pay capital gains tax? Does this make sense? I never did understand about that $1 per month thing.

[ebaines]

I don't think either tax preparer is correct. The house was a gift from your mother to the 4 siblings, and as such your cost basis is equal to your mother's cost basis, split 4 ways. Her cost basis would be the amount she paid for the house plus the costs of any capital improvements made over the years. The only time you can use fair market value (FMV) as of the date of the gift as the cost basis is if the property is later sold at a loss - was it?

I don't understand at all what the second tax preparer is thinking - even if you could treat the property as sale of a business you still have to pay capital gains taxes unless you reinvest the proceeds into another rental property.

By the way - assuming the property was titled as joint tenants with rights of survivorship, now that one sibling has passed away his 1/4 ownership passes to the the three remaining siblings and the cost basis of that 1/4 of the house gets stepped up to FMV as of the date of his passing. That should help a bit with the tax calculations.

[AtlantaTaxExpert]

Ebaines once again has covered the issue comprehensively, though I might add that the death of the brother may require two separate entries on the Form 8949, one to show the mother's gift basis and the second to show the stepped basis.

[kokocorn]

I guess it was sold at a loss since the value was $500,000 at time my mom changed her deed to put our names on and we ended up selling it for $450,000.

[ebaines]

I guess it was sold at a loss since the value was $500,000 at time my mom changed her deed to put our names on and we ended up selling it for $450,000.

And what was her cost basis?

[kokocorn]

And what was her cost basis?

Believe it or not, she only paid $18,000 for this house in the 70's (we live in Hawaii) and there was only about $15,000 in improvements. So cost was very low. Value went up considerably in more recent times.

[ebaines]

Well then, here's the bad news: your tax cost basis is 3/4 of your mother's basis plus 1/4 of the FMV as of the date of death of the brother. This works out to:

3/4($18K+$15K)+1/4(500K) = $158K. It's not a loss at all, but rather a gain of $450K-$158K = $292K. If your mother had willed the property to the four of you upon her death rather than giving you the property while still alive you would owe no tax, but now it looks like the three of you will each have to report 1/3 of that gain.

[AtlantaTaxExpert]

I concur with ebaines. Your mother should have consulted with a tax professional before making the gift.

[kokocorn]

Thanks for all your advice. I'll talk to my sisters. Appreciate all your help.

[AtlantaTaxExpert]

Glad to help!