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Are there taxes due on house sale?

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arytech

Junior Member
Reply

Thanks for all your advice Tranquility and Divgradcurl! I believe I will seek out a CPA specializing in real estate before any funds are transfered to siblings.
Appreciate your help
Arytech
 


divgradcurl

Senior Member
Contributing "no part of the purchase price" is completely different from being gifted 50% of the home's value.

Here's Findlaw's summary on JTWROS, which discusses what happens when you gift half of your house by titling the house as JTWROS, and discusses the "carry-over" basis for the 50% that is transferred via the gift: http://library.findlaw.com/2000/Apr/1/129100.html
 

tranquility

Senior Member
If another poster is putting out case law, regulations and statute, it isn't really appropriate to cite "Findlaw". Especially when it is not detailed on point and the poster makes a conclusion there is a difference between a lack of contribution on formation if there is a gift. (By the way, how else can there be a lack of contribution but for a gift?)

For an explination of the IRC sec. 2040, see the Regulations at Regs. Sec. 20.2040-1. Joint interests.

In, Patten v. United States, KTC 1997-184 (4th Cir. 1997), the question arose of the same type as mentioned in Hahn v. Commissioner. The appellate court listed the facts as:
"David Blaney, Taxpayer's husband, inherited the Property in 1952. On December 24, 1955, Blaney deeded the Property to himself and Taxpayer as tenants by the entirety. Blaney died on July 26, 1955), and Taxpayer became the sole owner of the Property. When Blaney died, the fair market value of the Property was $500,000. Blaney's estate included 50% of the value of the Property on his federal estate tax return.

In 1990, Taxpayer sold the Properly for $625,000. She reported a taxable gain from the sale of $199,133. 1 based on an adjusted basis of $256,982. Taxpayer died on June 16, 1993. Patten, the administrator of Taxpayer's estate, filed an amended return for 1990 and sought a refund of $127,384. Patten arrived at this figure in part by increasing Taxpayer's adjusted basis in the Property from $256,982, the amount originally claimed, to $500,000, the full fair market value of the Property at the time of Blaney's death."

The IRS felt that, although this was the correct result under previous law, the changes to IRC 2040 regarding spouses made the result incorrect and the wife should only get the step-up as you describe. (Again, this was a timing issue where the death is after the change, but the creation is before.)

The district court found Patten's calculation correct and the 4th circut affirmed.

In, Gallenstein v. United States, KTC 1992-31 (6th Cir. 1992), we have the same issue scenario with the fact summary of:
" On July 11, 1955, taxpayer and her husband purchased real property in Kentucky for $38,500, derived from her husband's earnings. The property was held in joint tenancy with right of survivorship. On December 12, 1987, taxpayer's husband died and she became sole owner of the farm. On July 5, 1988, Gallenstein sold 73.6 acres of the farm for $3,663,650. Under the terms of the purchase contract, taxpayer received $800,000 of the total purchase price in 1988, the remainder to be paid in installments over five years.

On her 1988 federal income tax return, Gallenstein initially reported a capital gain from the sale of the real estate based on net proceeds received from the sale in the amount of $3,659,596 and an adjusted basis of $103,000 1 with a resulting taxable gain of $3,556,596.

In May of 1989, taxpayer filed an amended federal income tax return for the 1988 tax year, reporting $1,838,685 as the adjusted basis for the property. This reduced the total realized gain from $3,556,596 to $1,815,725. Taxpayer therefore sought a refund of $105,395.

Gallenstein filed a second 1988 amended federal income tax return in August of 1989, on which she reported the full sale price of $3,663,650 as her adjusted basis in the farm property. This amount reflected an amended estate tax return filed by her husband's estate, claiming the full value of the property as includable in the decedent's gross estate. Because Gallenstein did not contribute toward the initial purchase of the farm in 1955, she received 100 percent of the property at the time of her husband's death. This resulted in a 100 percent step-up in basis under I.R.C. section 1014 and no gain to her from the sale of property in 1988. See I.R.C. section 1001(a). 2 Based on this amended return, taxpayer claimed a tax refund of $115,152 for the 1988 tax year.

The Internal Revenue Service accepted taxpayer's first amended income tax return for 1988 and paid taxpayer $105,187 (adjusted downward by the IRS in the amount of $208,000 as a tax refund). However, the IRS denied Gallenstein's second amended return and claim of a tax refund for $115,152, stating that pursuant to section 2040(b)(1) she could not receive a stepped-up basis for 100% of the property, but only for 50% of the property. Gallenstein brought suit in federal court, seeking a refund of federal income taxes, plus interest and costs. "

District found for wife and the 6th circut affirmed.
 
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divgradcurl

Senior Member
(By the way, how else can there be a lack of contribution but for a gift?)

Well, when two people purchase a house together, and one person pays the downpayment, as you noted, the calculation takes into account the one person's contributions when determining the portion held -- in other words, the two people have different ownership interests in the house. If one person decided to quit claim their interest in the house, the portion they would be allowed to quit claim would be apportioned based on the contributions (or, another way of looking at it, the other party would be "reimbursed" for contributions).

In a gift situation, 2040 states that when there is no apportionment stated, and the joint tenancy was created via a gift, then the ownership of the joint tenancy is divided by the number of joint tenants -- equal ownership percentages. There is no suggestion of apportionment based on contribution.

If another poster is putting out case law, regulations and statute, it isn't really appropriate to cite "Findlaw".

None of the caselaw posted is relevant to the factual situation here, though. Both of the cases you cited deal with spousal situations, whereas the OP is not a spousal situation. 2040 clearly treats spousal situations different from non-spousal joint tenants.

The OP has already decided to go to a CPA, perhaps the OP can post back once the CPA figures out what exactly the tax basis actually is.
 

tranquility

Senior Member
In a gift situation, 2040 states that when there is no apportionment stated, and the joint tenancy was created via a gift, then the ownership of the joint tenancy is divided by the number of joint tenants -- equal ownership percentages. There is no suggestion of apportionment based on contribution.
No. That refers to what happens if all the tenants are joined at the same time from a gift. (Dad gives all his children the house to own in joint tenancy and removes his ownership completely.)

None of the caselaw posted is relevant to the factual situation here, though. Both of the cases you cited deal with spousal situations, whereas the OP is not a spousal situation. 2040 clearly treats spousal situations different from non-spousal joint tenants.
I agree the issue was related to spousal situations and the holding was specific to them. The issue in those cases was the timing one. Are the spouses to be treated like everyone else under IRC 2040(a) or like spouses under changes of the law under IRC 2040(b)? The problem resulted from the fact the Joint Tenancy was created before the change and the death occured after the change. In the discussion of the *law* (and the conclusion of the case(s)) was that paragraph "b" did not apply and the proper treatment was the contribution rule. In all three cases, the inclusion of the entire property in the estate of the deceased and the step-up was 100%. In tax court and in the 4th and 6th circut cases all had the same discussion and all came to the same conclusion--100%

The OP has already decided to go to a CPA, perhaps the OP can post back once the CPA figures out what exactly the tax basis actually is.
If the CPA he goes to comes up with a 50% result, the OP should find another CPA who can come up with the correct result.

Info edit from google search:
A good history of the spousal issue is at:
http://www.nysscpa.org/cpajournal/1999/0299/Departments/D680299H.HTM
Clearly, we're still talking about spouses, but the conclusion is to consider treating the spouse as a pre-2040(b) mere joint tenant if the Joint Tenancy was created pre-1977.

Or, go to:
http://www.bus.lsu.edu/accounting/faculty/lcrumbley/1764_WFT_ch17.pdf
and see examples 43 and 44 on the .pdf page 26. (Document page 17-26)

From 2004 CCH:
"Under Code section 1014, if the survivor of a joint tenancy or tenancy by the entirety receives the property by reason of the death of a decedent dying before 2010 and the property was included in the decedent's gross estate for federal estate tax purposes, the basis of the property received is the estate tax basis (fair market value at the date of the decedent's death or, if applicable, on the alternate valuation date). In order to
determine whether or not such property is includible in the decedent's gross estate, reference must be made to Code section 2040.

"Under Code section 2040, the general rule is that the gross estate
includes the entire value of property held jointly at the time of death by the decedent and another person or persons with the right of survivorship, except that portion of the property that was acquired by the other joint owner or owners for adequate and fair consideration in money or money's worth."
 
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