House sale, revisited, is my math correct?

[Jim-from-Ohio]

Can someone check my logic on this. 

This is to revisit the issue where my client's mom got questionable advice years ago.

My client's mom sold her principal residence in 2022 and would have qualified for the home buyer exclusion.  The issue though in 2015 the three children were added to the deed. So starting in 2015 the house was owned 25% by the mom and 25% by each of the three children. There were four 1099-s issued in 2022, each for 25% of the proceeds.  I am not preparing the mom's return, who is still alive.  I am just preparing one of the  three children's return.

Here are what I think are the key factors

- 1962 House built.. with imporovents total cost was 65,000

- Dad on title only in 1962, mom not on title

- 1989, mom and dad got divorced, as part of settlement, mom got house.. dad removed from deed, so      mom sole owner in 1989.

- 2015 - each of the three kids added to the deed.

- FMV in 2015 say was 265,000, increase of 200,000 over basis in house

- 2022, house sold for 332,000

- each 25% owner received 1099 for $ 83,000

- looking to establish basis for my client, one of the three 25% children

- would this be proper math/logic for the basis:

- 65,000 cost divided by four to get first figure of 16,250

- then add to that 25% of the increase in FMV from 1962 to 2015 (265,000 - 65,000) / 4 = 50,000, add't     step up

- so new total basis  16,250 + 50,000 = 66,250

Does this sound right?

[IRonMaN]

No step up in basis for gifting.  Basis would be dad's original basis when he turned it over to mom plus any improvements done since that time so basis for your client would be the $16,250.

[qbteachmt]

Agree with the $16,250 right now.

This might seem to be a confounding consideration but is meaningless to your task: "1989, mom and dad got divorced, as part of settlement, mom got house" because a settlement is going to take various valuable things into consideration. That isn't a property tax or income tax issue, though. It's like two kids dividing up the toys. Mom gets it at Dad's basis, unless there is a buy out at FMV as part of the divorce (such as a refi to FMV). That's one consideration I don't see already covered in all the comments, now that we know Mom was the sole owner at this point.

This seems like it should be applicable to something or someone, but it is meaningless: "FMV in 2015 say was 265,000, increase of 200,000 over basis in house" because the type of changing of ownership as well as the timing, makes a difference. In this case, nothing for the children triggers a step up in basis, and unless the divorce triggered a step up in basis (due to a buy out), everyone works off of the $65,000 improved basis from Dad's original ownership.

[Jim-from-Ohio]

is there anything else that would boost the basis of the children?  The whole idea of putting the children on the deed looking back looks like it was a big mistake. 

[BobKamman]

Result might be different if the divorce happened before 1984 and the revision of Code Section 1041.  Just thought I would mention that in case someone doesn't remember the 1962 Supreme Court decision in Davis, which called divorce property splits a taxable event in many situations, and relies on the answers here for a different set of facts.

You can probably come up with another $62K in basis by finding the cost of new roof, HVAC, flooring, plumbing and bath/kitchen upgrades for the last 60 years.  It helps that Mom is still alive, if she is still mentally competent.  

[sjrcpa]

@qbteachmt A refi to facilitate the buyout between Mom and Dad incident to divorce would not increase basis under 1041 (unless maybe it was an old divorce as Bob mentioned).

[Skylane]

Jim;   <<The whole idea of putting the children on the deed looking back looks like it was a big mistake.>>

People put kids on the deed;  transfer;  assets for a whole lot of reasons that make sense at that time.... 

5 year Medicaid lookback is one of the bigger reasons people try to protect (their parents money).. 

If circumstances were different and mom ended up in a nursing home, or had a gambling habit, or whatever...

Good bad or otherwise, the decision came with tax consequence.  End of story.  Don't feel bad, just let em know what they owe. 

[qbteachmt]

"A refi to facilitate the buyout between Mom and Dad incident to divorce would not increase basis"

But she didn't own it prior to the divorce. I was trying to incorporate this: "Dad on title only in 1962, mom not on title
- 1989, mom and dad got divorced, as part of settlement, mom got house.. dad removed from deed, so mom sole owner in 1989."

Dad removed from title. Mom got the house, but never was on the title. So, now it depends on the legal ownership for the State, when the couple married, but the title never changed.

If it included financing along with the change of title, it might be that she bought the house at this point.

This project is step-by-step, and every step matters.

[BobKamman]

---

@Skylane wrote:.. 

5 year Medicaid lookback is one of the bigger reasons people try to protect (their parents money)..  

Mom gets to go on welfare.  Kids get to go on a cruise.  

[sjrcpa]

"1989, mom and dad got divorced, as part of settlement, mom got house.. dad removed from deed, so      mom sole owner in 1989."

It doesn't matter if Mom bought it from Dad. No basis increase for transfers incident to divorce.

[qbteachmt]

That's why I included "unless." "and unless the divorce triggered a step up in basis"

"Internal Revenue Code Section 1041 It specifies the rules that apply to property transfers between spouses who are divorcing or divorced. Property transfers that occur within one year of a divorce or in connection with the divorce are treated as incidental to the divorce.

The asset is not subject to taxation and carries over its basis to the receiving spouse."

There has not been one event described in this chain of ownership that included a step up in basis, then.

83000 - 16250 = 66750 for everyone

[Skylane]

@Jim-from-Ohio    You mentioned << I am just preparing one of the  three children's return.>>  

I've had several similar situations over the years where multiple individuals received proceeds from a single sale... I've always felt it important that all recipients should be on the same page and either provided my work for all  or accepted that of other preparers. 

[BobKamman]

I've always felt it important that my client file a correct return. If she wants to share my work with others in the same situation, I tell her not to be surprised if someone else is doing it wrong.  Otherwise we can both MYOB.