My mother passed in May leaving my brother and I both executors and beneficiaries of her estate. It turns out, without either of our knowledge, she changed her deed to make herself, myself, and my brother "joint tenants with survivorship" This transfer was made in March 2003 and she passed in May 2005 (less than 3 years). The property is in NJ.

Does the 3 year rule make the transfer null (still her property in entirety) as far as inheritance taxes, estate taxes, capital gains etc. We would like to sell the property, and it's time to do the taxes. We'd feel better with some basic knowledge to where we stand.

Any suggestions, comments, recommendations?
Thanks

Sandcrow:

How much is the house worth, and how much is the estate worth? It's very possible that even if the 3-year rule reverts ownership of the house back to your mother's estate, the estate may be exempt from all taxes if it is worth less than $1.5M.

The property was appraised at 160,000 in July.

The total estate is less than the 1.5 million for Federal Estate Taxes, but more than the 675,000 limit set by New Jersey estate taxes.

Currently, I was just planning on listing it as her home in the entirety to be inherited by her beneficiaries at close of probate. I figured we would have to pay estate taxes on it, but it would be easier to understand capital gains responsibilities that way. But I want to be legal about all this.

Thanks!!

SandCrow:

Capital gains should NOT be an issue, because the basis of the house is accelerated to the current fair market value at the time of your mother's death. Any appreciation from the date of your mother's death to the date of sale will probably be offset by the costs of the sale.

If you have not already done so, you need to hire a NJ-based tax professional with experience in estate taxes to review your situation, just to be safe.

Thanks for the info, it is a help! There are so many "unchartered territories" in dealing with an estate for the first time and it is nice to have people willing to share knowledge that can make the trip less stressful!

Hi, my sister and I have inherited our father's home (no mtg) in 2010 in Arkansas (I live in Fl. she in Arkansas). The market being what it is, we are renting it out for $900/mo for almost a year now in order to keep the home in good condition and out of harm from vandals. The rental monies are going into an account via direct deposit. Thus far, we have not divided any money from the rental payments and have only paid expenses concerning the house... alos when th ehouse was originally puchased by our father, my sis gave him 10, 000$ and I gave 15,000$ toward the down payment... house was purchased for about $25,000 an this worth maybe $34, 000... questions are:

1. What do we do on our individual tax files (both of us file jointly with our husbands at this point)

2. How do we take advantage of the rental money (except for about 10,000 for repair expense fund) in one half shares until the house is purchased (renters are planning on purchasing within the year).

You converted the personal property to a rental property which was jointly owned between you and your sister, so you both need to show ONE-half of the expenses (including depreciation and the costs you cited) and rental income on Schedule E. You ARE permitted to show a loss on the Schedule E which can offset other income (like salary and wages), provided your overall income does not exceed a set amount in the $125K range.

The basis for the depreciation calculations was the Fair Market Value of the house on the day your father died. You can get that from any of the real estate agencies which do comparative valuation of properties in Arkansas.

Once you do sell the house, the costs of the sale can be factored into the capital gains calculations, which MAY result in a loss which you split 50-50 with your sister.

Your relative contributions to the purchase price are NOT a consideration, because those were considered GIFTS from you and your sister to your father.

STRONGLY recommend you get professional help in preparing your returns, both for the Schedule E AND for the tax year when you sell the house. The calculations required to recapture the depreciation on Form 4797 are NOT something an amateur should attempt.

If you want MY professional help, you can find my email address in my profile if you do not see it below.