USA What is the tax basis when selling a gifted home?

[Markg22b]

A father quick claim deeds a home to the daughter. On the deed, the father specifies that the transaction is a gift. The market value at the time of gifting is ~$275,000. The cost basis (father's original purchase cost) was $175,000. At the time the daughter sells the house she would have lived there for at least 1 year as her primary residence.

1. Is her capital gain tax basis $275,000 or $175,000?

2. If one assumes that the highest price the daughter could sell the house for after 1 year is $350,000, given the $250,000 primary home capital gain waiver, her worst case profit would be $220,000 which is $5,000 below the waiver which means she would owe no Federal Income tax--correct?

Mark

 

[Drmdcpa]

The recipient steps in the shoes of the donor for basis.

She also does not qualify for the principle residence exclusion if she only used it as principle residence for one year.

If it was the donors principle residence before the gift it could be argued that the use test was then met because again the recipient steps into the shoes of the donor.

If the donor held it as a second home or investment property, she would have to live in it at least two years to satisfy the use test.

If the donor holds the property as a rental, the recipient would have to use the property as principle residence for five years to get the full exclusion.

 

[Markg22b]

The father has been living in an assisted living facility for several years. The daughter has been living in the house for at least 2-3 years. I'm not sure if she pays her dad rent or not at this point.

The house has definitely been her primary residence for these past few years and would likely remain so for an indeterminate 1-4 year period.

Although she has the quick claim deed, she's hasn't filed it until she understands the tax consequences.

Are the rules you stated the same for within a family vs. arms length regarding length of time needed to stay in the house once the deed has been recorded, or?

Is this all federal tax law and therefore whichever state this is occurring in has no bearing?

Thanks,

Mark

 

[Markg22b]

Clarification--

The donor has held it as a second home only because his primary is an assisted living facility (he pays rent). If primary vs. secondary is defined only as a residence that you own, then despite not living there, it's his primary home?

The donor has not held the property as a rental. The daughter has lived there with the consent of the donor and without paying any rent. This arrangement had been discussed and agreed to several years ago.

 

[Drmdcpa]

Section 121 is Federal law.

Sounds like you a lacking basic understanding and faced with a complex issue.

I would recommend the family meet with a qualified CPA.

 

[Markg22b]

Sentence # 2 is spot on.

We are in agreement with sentence #3. After wading into what I thought would be a simple thing, I already recommended to the parties involved that they do as you suggest.

Thanks very much for the patient explanations that have allowed us to move in an informed direction.

Mark