Expert: liznarr - 11/13/2010

Question
A long time family cottage has been passed along through a sale ($1.00) to
three sisters. Two want to sell and one is on the fence. The key to swing this
is to have a better understanding of the capital gains exposure. The $1.00
sale to each sister took place in 2005. The seller (mother) is now passed on. If
we were to sell now to an outside party, do we use the value from 2005 for
cost basis? Was this a gift (gift tax ?) or a purchase? Very confusing.

Thank in advance.

Answer
Hi Jon,

Sorry for the delay in responding to your question.

Your question is more a tax question than simply a real estate question, and I agree with you that your circumstance can be a very confusing topic.  

I am not qualified to give tax advice.  I am, however, giving you below what I believe may be the case and directing you to IRS Publication 551, Basis of Assets.  Before relying on any information in my answer, however, you should contact a tax attorney or a Certified Public Accountant to verify any information in this writing.

I am quoting below from page 6 of IRS Publication 551:  (You can download Publication 551 at http://www.irs.gov/pub/irs-pdf/p551.pdf   

“Basis Other Than Cost  -  There are many times when you cannot use cost as basis.  In these cases, the fair market value or the adjusted basis of property may be used. Adjusted basis is discussed earlier.

Fair market value (FMV). FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property on or about the same date may be helpful in figuring the property’s FMV.”

Your basis, as you mentioned, is quite possibly the fair market value at the time of the family transfer/sale in 2005.  You would, of course, add to your original basis any capital improvements made since obtaining the property to arrive at your adjusted basis for IRS purposes.

LOGICALLY speaking -- and I am qualifying this comment, again, because I am not an expert in this field -- the house was a gift, and not a purchase, if the sale/fair market value to the three sisters was more than One Dollar.  However, for IRS reporting purposes, I really do not know if the Gift Tax law would apply.  Even if it does, I believe the gift tax exclusion in 2005 was $11,000.  

An IRS link on gift taxes you can review for yourself is http://www.irs.gov/businesses/small/article/0,,id=108139,00.html#2

Also, Publication 950 on Gifts would be helpful for you to read...
http://www.irs.gov/pub/irs-pdf/p950.pdf

I hope the above is helpful and points you to information you have not yet reviewed.

Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth