Gifted/Deeded House

[B2BJUMBO]

Father in law bought house from family for 1$ about 50 years ago. In 2008, he re-deeded the house to his himself and 2 daughters. House was assessed tax wise at 122,000 at that time. The house was auctioned off last month (Sep 2013) and sold for 70,000$. The terms "Life Estate" seem to be thrown around a lot in this deed if this helps with any terminology.

A "BIG NAME" tax preparations company that I have visited twice is saying all they need is the cost of house (1$), the sale price (70,000 minus any realtor fees) and the improvements spent on the house to determine the capital gains tax that we have to pay. In this scenario, they are saying 69,999$-40,000$(improvements) = 29,999$ tax basis. This would be divided by 3 (3 people in deed). Which would mean just about 10,000$ for each person to be taxed on.

I normally am in the low tax bracket with an AGI of about 50,000$.

Does this mean I will be taxed long term gains at 10% (10,000$ X 10% = 1,000$)?

This home is out of the state I live in. The lawyer handling the closing was saying something about a Step-up tax cost basis and involved the 122k 2008 tax assessment figure and the 70,000$ sale, which is showing a loss. However it is my understanding that the step-up scenario is when the owner dies and the house is gifted to you. The father in law is still very much alive (Thankfully).

Any help in this matter would be so much appreciated. It's not very comforting when the folks that are suppose to know how to handle this give you very different stories.

 

[The Finance Writer]

You may be "saying" $40,000 of improvements, but you need to substantiate a true amount rather than give a round number estimate. You're referring to $29,999 as the "tax basis" but this is actually the capital gain.

The total gain is $70,000 minus the cost basis. The basis is $1 plus the improvements ($40,000 if accurate) plus the selling costs (commission, title policy, & such).

You are correct that there is no step up in basis because nobody has inherited the property. The value at the time of the gift is not relevant because it's higher than the giver's basis. However, whether you have a completed gift depends upon local law. The federal income tax on the capital gain is divided among the three parties only if this is a completed gift of ownership interest. A "life estate" is a type of ownership that is different than a "fee simple" ownership upon which taxable capital gain is determined. I recommend obtaining an explanation of this that you understand from a competent attorney -- not the one who has confused you with inaccurate talk about step up basis.

The gain of the father-in-law is probably exempt from tax if the house was his primary residence for two of the preceding five years. The daughters are taxed on their shares of the gain -- if they have completed gifts (which they seem to have and subsequently gave the old man a life estate).

 

[B2BJUMBO]

Thank you,
The house will close tomorrow at 3:30. They have the receipts for all the improvements and will be making me a copy of the receipts. $40,000 is not the exact figure but it is close and I was using that figure to keep the numbers simple.

I do believe my father in law will be exempt from paying taxes on his portion as he has lived in the house for those 55 years or whatever it is. Figured his portion would be treated just like the rest of us who sell a house we have reside in up to 250K.

Going to confirm this "life estate" lingo with the father in law. Is it to my advantage that it was a life estate versus a "fee simple" ownership?

Would you say that the worst case scenario, if my numbers are true and accurate as told in the above post, that I would probably only be cap gain taxed on 1/3 of the 29,999$ cap gain at 10%? (appears to be about a 1,000$ tax)

Thanks,