Are there taxes due on house sale?

[arytech]

I live in Ca. My mother lived in Las Vegas, NV. She pasted away and I was on deed to property. House is currently in Escrow for $240,000. minus closing cost, free and clear. Even though I am the only one on deed I will be splitting proceeds with 4 siblings. I don't want to split the 5 ways and then find out afterward I owe taxes on total sale amount because chances are I would have to pay all if it happened. I understand there is no death tax but are there others? Should I seek out a real estate lawyer?

 

[moburkes]

Were you the only one on the deed, or was your mother also on the deed? This is confusing? If it was just you, what did you do when you got your name on the deed? Did you pay taxes then?

 

[arytech]

Reply

Thanks for looking over question moburkes. My mother was on deed and added me after our father passed away. I had never paid any property taxes until just recently when they became due.

 

[moburkes]

Did this go through probate already?

 

[arytech]

Reply

There was a bank CD and vehicle and we already went through and completed probate in NV.(ORDER TO SET ASIDE ESTATE WITHOUT ADMINISTRATION)
My mother filed a Quit Claim Deed (notarized and filed with state) and listed me as joint tenant with rights to survivorship. I was listed as personal representative (executor) in the will.

 

[divgradcurl]

There was a bank CD and vehicle and we already went through and completed probate in NV.(ORDER TO SET ASIDE ESTATE WITHOUT ADMINISTRATION)
My mother filed a Quit Claim Deed (notarized and filed with state) and listed me as joint tenant with rights to survivorship. I was listed as personal representative (executor) in the will.

Then yes, there will be taxes due when you will sell, unless you have lived in the house as your primary residence for 2 of the last 5 years after it was quit-claimed to you.

You should have seen a lawyer BEFORE the house was quit-claimed to you -- had your mother allowed the house to pass through probate, you would likely owe NO tax. But since the house was a "gift" that passes outside of probate, you do not get a step-up in basis, and you will owe taxes on the gain in the value of the property above what your mother originally paid for the property. Unless your mom passed away more than a year ago, it is likely that at least some of that gain will be taxed as rodinary income to you; if it has been at least a year, you may find that some or all is taxed at the lower capital-gains rate. If you lived in the house for 2 of the last 5 years (since the quit-claim) as a primary residence, you may not owe taxes.

Your best bet is to see a CPA before handing out any money to anyone. You may be in for a hefty tax bill.

 

[xylene]

Not to mention your need to file a gift tax return for your siblings shares.

Another estate that 'planned' to avoid the 'death tax'

Pleases do listen to the 'death tax' rhetoric of G. Gordon Liddy, rush and that jerk with beady eyes, and never wonder really why you owe so much tax.

 

[tranquility]

The property was not "quit claimed" as per the OP if he were placed on title as a joint tenant with rights of survivorship. A quit claim deed relinquishes all rights and it appears mother retained many.

Because of the error in nomenclature (and other facts which would need to be developed), I suggest the OP speak to a qualified tax preparer with knowledge of real property. The "gift" of the rights of survivorship should probably have had a gift tax return prepared for 1/2 of the value of the property at the time of giving.

The trick is that a gifting of property usually results in the receiver getting the basis of the giver. Here, we should use a proportional purchase rule as the creation of the joint tenancy is not with a spouse. The amount of the property which was paid for, proportionally, by the deceases spouse is included in that person's estate. Since mother paid for it all and OP paid for none, 100% of the house is included in mother's estate. Since 100% was included in the estate, 100% would get a step-up at death of mother.

The capital gains/ordinary income will be taxed on the amount of appreciation (if any) after mother's death. This means that unless the property was held for a while, there should be no income taxes on the sale.

 

[divgradcurl]

Tranquility, why do you think there is an error in the deed? A quit claim CAN be used to convert one person's interest into a joint tenancy between that person and another person. There is nothing in the OP's posts that suggest that the deed was defective.

There is no evidence that this house went through probate, so there is no step-up in basis. If it turns out that the deed is, in fact, defective, then there would be a step-up in basis after going through probate. But, then again, this question would probably be irrelevant, because in the absence of a will, the house would have gone to all of the siblings in the first place.

 

[tranquility]

A quit claim CAN be used to convert one person's interest into a joint tenancy between that person and another person.

My understanding is that a "quit claim" deed is a non-warranty deed where the grantor disavows *any* interest in the property covered by the deed. To transfer from a fee simple to a joint tenancy WROS, one merely makes a deed. The term "quit claim" is not typically used.

There is no evidence that this house went through probate, so there is no step-up in basis.

Probate is irrelvant to step-up. A living trust or other revocable trust is an example. This situation is another.

If it turns out that the deed is, in fact, defective, then there would be a step-up in basis after going through probate.

I'm assuming a valid transfer to a JTWROS was made in my answer. However, my answer was technical and assumptions were made. Some of those assumptions may have been incorrect, especially because the OP was probably not using correct terms as in the quit claim to joint tenancy claim.

But, then again, this question would probably be irrelevant, because in the absence of a will, the house would have gone to all of the siblings in the first place.

If the deed were defective (and proven such), and if there was no will, I agree intestate succession would happen and there would also be a step up.

 

[divgradcurl]

My understanding is that a "quit claim" deed is a non-warranty deed where the grantor disavows *any* interest in the property covered by the deed. To transfer from a fee simple to a joint tenancy WROS, one merely makes a deed. The term "quit claim" is not typically used.

That's a correct understanding of a quit claim -- but the person disavowing interest in the existing deed can certainly gain interest in the resultant deed, which is what apparently happended here. You are correct in that a general warranty deed could have been used, but if someone wanted to forego seeing a RE agent or title agent or attorney, a quit claim is a simple form that can be done without assistance from a professional.

Probate is irrelvant to step-up. A living trust or other revocable trust is an example. This situation is another.

You are correct, left out the fact the Mom's half would be stepped-up, so only half of the value of the house will be taxed on sale (assuming no appreciation since the mom died). I don't think you can get 100% step up in value just because the Mom paid for all of it -- Mom didn't own all of it at her death, only 50% (after the creation of the joint tenancy, the daughter could then have quit-claimed 50% of the property to another party). The 50% Mom did own will be stepped-up, but the 50% that belonged to the daughter would have the same basis as her mom, and that portion would not be stepped-up.

 

[tranquility]

I don't think you can get 100% step up in value just because the Mom paid for all of it -- Mom didn't own all of it at her death, only 50% (after the creation of the joint tenancy, the daughter could then have quit-claimed 50% of the property to another party).

There *is* a step-up on 100%. If the parties were spouses, the rule you state would be correct. (And is why California has the special "as community property" designation on ownership.) This is not that situation.

With the facts of a JTWROS being created with no contribution or payment by the new non-spouse joint tenant and the original owner dies:
--A gift tax should have been filed for 1/2 the value of the property at the time of the gift. (If above the limit of no reporting.)
--The basis of the property, if sold, will be the giftor's basis plus any gift taxes paid. (I'm not sure, without researching, if the gift tax would be completely applied to the giftee's 1/2 of the basis or to the entire basis to be divided by 2.)
--The entire FMV of the property (less any amount paid for gift taxes) at death is included in the deceased estate because there was no contribution by the joint tenant.
--The entire property receives a step-up in basis.

Info edit:
The place to find the result (At least what seems the sticking point of the result.) is IRC Section 2040(a).

 

[divgradcurl]

There *is* a step-up on 100%. If the parties were spouses, the rule you state would be correct. (And is why California has the special "as community property" designation on ownership.) This is not that situation.

I don't want to start an argument, but I'm not sure you are reading the statute (2040) correctly. The statutes states, in part:

"Provided further, That where any property has been acquired by gift, bequest, devise, or inheritance, [...], where so acquired by the decedent and any other person as joint tenants with right of survivorship and their interests are not otherwise specified or fixed by law, then to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants with right of survivorship." (emphasis added)

I chopped out the piece for spouses for clarity. If my reading is correct -- and I am providing no guarantee that it is, but at least it is consistent with my understanding of estates! -- this states that only the decedent's half is included in their gross estate, so only that half is entitled to a step-up in basis.

There has always been a tradeoff between JTWROS and probate -- with JT, you avoid the probate process, there is no question as to who gets the property, but you only get a step-up on the fractional percentage owned by the decendent. Via probate, you have to go through probate, who gets the property is decided by the will or intestate succession, but the entire value of the property is entitled to a step-up in basis. If you could avoid probate and provide a full step-up in basis via a gift of a JTWROS, then that's what everyone would do -- just add in all of their kids as JTWROS right before the last spouse died, and then voila no need for probate, and everyone gets a full step-up in basis. To my understandig, that is not how this works.

--A gift tax should have been filed for 1/2 the value of the property at the time of the gift. (If above the limit of no reporting.)

Agreed.

--The basis of the property, if sold, will be the giftor's basis plus any gift taxes paid. (I'm not sure, without researching, if the gift tax would be completely applied to the giftee's 1/2 of the basis or to the entire basis to be divided by 2.)

Not sure about this either!

--The entire FMV of the property (less any amount paid for gift taxes) at death is included in the deceased estate because there was no contribution by the joint tenant.

Disagree. See my parsing of 2040 above.

--The entire property receives a step-up in basis.

Disagree.

I will admit, 2040 is not the most clearly-written statute I have ever seen. Do you know of any caselaw or IRS publications that elucidate the meaning of 2040?

 

[tranquility]

There has always been a tradeoff between JTWROS and probate -- with JT, you avoid the probate process, there is no question as to who gets the property, but you only get a step-up on the fractional percentage owned by the decendent.

With *spouses* you get the 50%. With others you get the proportion of contribution. You also have to figure the gift tax/estate tax issue for large estates where JTWROS does not help because of IRC 2040 as it includes it in the estate of the original owner.

Although the case had to do with spouses (and a timing issue regarding the change in 2040 related to creation of the tenancy and the death of one of the spouses), in Hahn v. Commissioner, 110 T.C. 140 (1998) the current law was discussed:
...
Section 2040 governs the value of jointly-owned property to be included in a decedent's estate. Before 1977, section 2040 5 provided that the gross estate includes the value of all property held at the time of a decedent's death by the decedent and another person in a joint tenancy or tenancy by the entirety, except such part of the entire value that is attributable to the amount of consideration in money or money's worth furnished by such other person. Thus, the rule established a "contribution test", whereby the estate of the deceased joint tenant must generally include the value of the entire property less the portion of the property attributable to the consideration furnished by the surviving joint tenant. The statute creates a rebuttable presumption that the value of the entire property is includable in the deceased joint tenant's estate, and the burden of showing original ownership or contribution to the purchase price by the surviving joint tenant falls upon the estate. Estate of Heidt v. Commissioner, 8 T.C. 969 (1947), affd. per curiam 170 F.2d 1021 (9th Cir. 1948); Estate of Balazs v. Commissioner, T.C. Memo. 1981-423, affd. without published opinion 693 F.2d 134 (11th Cir. 1982).

In 1976, subsection (b) of section 2040 was added to the Code by section 2002(c)(1) of the Tax Reform Act of 1976 (TRA 76), Pub. L. 94-455, 90 Stat. 1520, 1855. 6 The 1976 amendment created a special rule where the joint tenants were husband and wife. If the interest was a "qualified joint interest", 7 only one-half of the value of the property owned in joint tenancy was includable in the decedent's gross estate, without regard to which spouse furnished the consideration to acquire the jointly held property. 8 TRA 76 sec. 2002(d)(3), 90 Stat. 1856, provided an effective date for the new 50-percent inclusion rule of section 2040(b), making it applicable to "joint interests created after December 31, 1976."

Congress amended section 2040 again in 1978, with the addition of subsections (c), (d), and (e). Revenue Act of 1978, Pub. L. 95-600, secs. 511(a) and 702(k)(2), 92 Stat. 2763, 2881, 2932. Essentially, these subsections provided a mechanism whereby an election could be made to treat joint interests created prior to 1977 as "qualified joint interests" subject to the 50-percent inclusion rule of section 2040(b).

The final relevant amendment to section 2040 took place in 1981. Subsections (c), (d), and (e), which had been adopted in 1978, were repealed. Economic Recovery Tax Act of 1981 (ERTA), sec. 403(c)(3), Pub. L. 97-34, 95 Stat. 172, 302. The definition of a "qualified joint interest" in section 2040(b)(2) was redefined to eliminate the requirement that the creation (or recreation) of the joint interest be treated as a gift. 11 ERTA sec. 403(c)(1); 95 stat. 301-302. However, the operational provision of section 2040(b)(1), providing for 50 percent inclusion, was not changed. The effective date provision of the 1981 amendment made these changes applicable "to the estates of decedents dying after December 31, 1981." ERTA sec. 403(e)(1), 95 Stat. 305.
...

 

[tranquility]

For the tax wonks, from Kleinrock, the calculation:

EXAMPLE 3: Robert and Mary, a brother and sister, owned property as joint tenants with right of survivorship that they purchased for $60,000. Robert furnished two-thirds of the purchase price and Mary furnished one-third. On Robert's death, the total depreciation taken on the property was $24,000 and the property had a fair market value of $120,000. Under local law, Robert and Mary each had an undivided one-half interest in the property and, therefore, each was entitled to one-half of the property's income. After Robert's death, Mary's basis in the property is determined as follows:


Interest acquired by Mary with her own funds
(1/3 X $60,000) $ 20,000
Interest acquired from Robert
(2/3 X $120,000 FMV) 80,000
--------
$100,000

Less Mary's share of the depreciation
(1/2 X $24,000) (12,000)
--------
Mary's basis on Robert's death $ 88,000
========


If Mary had contributed no part of the purchase price, her basis in the property on Robert's death would be $108,000, the fair market value of Robert's interest ($120,000) reduced by one-half of the depreciation (1/2 X $24,000). If instead Mary had no right to any share of the property's income under local law, her basis of $120,000 would be unreduced by any depreciation previously taken.