Expert: Dick Dennis - 8/14/2010

Question
I own a six flat and a two flat on the same lot with my brother, sister, my wife and my sister in law left to all of us by my mom who passed last June. My sister has resided
in the two flat for a discounted family rate for 30 years.
My brother and I own our own homes and have not lived at the property for 25 years.
We are thinking of selling sometime soon. Let's just say the buildings are worth 3M together. Will my sister be exempt of capital gains because she resides there? Or can we split up the exemption between the 5 of us? HOw does this all work?

Answer
Assuming the five of you own the properties equally, your sister indeed would be responsible for capital gains in relation to her ownership if she continues to have her ownership. But she has barely come into ownership, so as of now, she may not have any capital gains to be concerned about.

If your mom conveyed ownership as equal ownership to the five of you, you may have another problem. Your sister and the rest of you may have taken over your mom's low tax basis when she bought the properties many years ago. That means all of you may have a healthy capital gains if you do sell.

Further, your mom, and now you five, have to maintain a depreciation schedule. If the depreciation from your mom depreciated the properties down to or close to zero, if you sell the properties, you can expect a healthy capital gains problem.

But, all of that will go by the wayside if your mom owned the properties through a family trust. Additionally, your sister has been living there at less than market, therefore, the IRS will be looking into that and possibly adding a tax onto your other problems.

Your sister has been paying rent, so she has no concern as a tenant. But she does have a concern for her share of ownership. So before this goes any further, I strongly suggest you consult a local real estate CPA, or tax attorney and make sure everything is put on track as it is supposed to be. Don't be foolish. It'll cost you lots more in tax obligation if you do not have a tax professional make sure this is done correctly.

I do wish you well.

Dick Dennis
CA Real Estate Broker
Lic. #00349415
dixiedee13@aol.com