Level 4

Question

Capital gains tax and basis consideration

Forum|Forum|4 years ago
September 19, 2021
3 replies
27 views

Client purchased parent’s home with siblings about twenty years ago. Due to family circumstances at the time, the three kids decided to buy out one parent (50%) interest in the home. The resulting transaction was that one parent would still have ownership of 50% and the three kids would have a 1/6 interest in the property. Fast forward twenty years, the remaining parent (with 50% interest) have now passed on and with skyrocketing home values, children have all decided to sell the property at a significant gain. As there were no estate tax planning during the preceding years and no consideration of gifting property interest, etc., I wanted to get some insight on the resulting tax consequences. There would be capital gains based on the basis when the property was acquired by children compared to current sale price; however would that now be capital gains based on a 1/3 ownership interest and how should measurement date for basis be best determined (based on acquisition of initial interest, parent 50% FMV interest at time of death, etc.)?

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TaxGuyBill

Level 15

The kids' Basis is the amount they paid (1/6 of the total FMV when they bought it) plus 1/6th of the total FMV on the date of death (1/3 of the 50% of the recently deceased parent).

joshuabarksatlcs

Level 9

I would add:

Plus the improvement costs, if applicable, paid by the owners after the first parent's death. (1/6 of the costs assuming paid on a pro rata basis.)

I come here for kudos and IRonMaN's jokes.

joshuabarksatlcs

Level 9

Oops. Just realized I somehow misread the facts and "killed" the parent. It should say "after the buy-out from the parent twenty years ago."

I sometimes fast forward faster than other fast-forwarders...

I come here for kudos and IRonMaN's jokes.

BobKamman

Level 15

But I don't want to fast-forward 20 years. I want to go slowly, and find out what happened to the parent who was bought out. Let's call him Dad. Did he then qualify for taxpayer-financed nursing-home care, while Mom got to keep the house? What did he do with the "sales" proceeds, anyway? Who was paying for the taxes, insurance, maintenance and repairs for the last two decades? Was anyone else living in the house?

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Richard1024Author

Level 4

Greatly appreciate the feedback. I further inquired just to make sure my understanding of facts of the situation is correct as sometime having a written narrative provides more clarity that verbal. Update to the scenario:

There are three siblings. Only one parent is included in transaction as follows:

One of the sibling and mother purchased property back in 1980 (50/50% interest each). Years later due to health concerns, mother 'gave'*** her 50% share to each of the three children (includes a portion to the initial sibling purchasor). The sibling that initially purchased the property with mom is not my client. The portion received by my client would be 1/3 of the 50% that was transferred from mother.

Mother passed away years ago and the three children continued their ownership interest in the property until now and have decided to sell. Gain would be 1/6th of net gain measured against date of death basis?

***I will clarify on the term 'gave'. Initially it was mother sold interest at a very small amount to children.

BobKamman

Level 15

Did the mother continue to live in the property until her death? Otherwise (and maybe even then) the basis for the three who share 50% is a third of Mom's basis (cost plus improvements).

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Richard1024Author

Level 4

Thank you! Yes mom continued to live in the house until her death. Cost of improvements were split among the three siblings after mom's portion was transferred to them. Prior to moms transfer, any improvements were split between the one sibling and mom (the initial 50/50% purchasers).

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