Husand and wife owned a home for 50 years. Husband died 20 years ago so wife was on the deed alone. Someone told her 20 years ago to add her three children to the deed. So at this point four people on the deed, 25% each.

 

Fast forward to tax year 2022. Mother still alive and house sells for $ 400,000. Total basis in house was $ 150,000, Gain was $ 250,000 which under normal situation would be totally tax free. The twist is there were four 1099s issued, each for $ 100,000.

 

On mothers tax return there is no issue. On the three children the IRS will be looking for the proceeds of $ 100,000 and the question of basis of course comes up. The spirit of the gain exlusion was met but the three children did not live in that house. Should these 1099s even have been issued?

 

The fact that there were 1099s issued though is there any leg to stand on to put the cost basis to equal the selling price for the three children so the gain is zero on the three childrens' returns.

The total gain was not more than $ 250,000 so if mother did not follow that advice 20 years ago this would be a totally tax free event. I know the two of five year rule and all that. I am just asking if anyone has ever seen this before and if there is any leg to stand on to showing the three children break even on the 1099. Thank you.