Tax Law (Questions About Taxes)/Question in how to handle this
QUESTION: Please answer all or as many of these as you can or feel qualified to do so.
I am a CA resident. My mother originally had a house in MS. While she was alive, 12 years ago she gave the house to her three children, putting the house in the names of the three
children with a Quit Claim Deed and with a Life Estate for her. Eventually Mom had to go into an Assisted Living Home and then a grandchild lived in the house for some years. None of the children lived in the house. Mom passed away four years ago. When she died, we understood the Life Estate ended. We didn't probate mom's estate because we thought that there was no need to. This year we sold the house and the proceeds were divided
among the three children. Each of us received a 1099-S for one third of the sale price.
Question 1. What basis do we use for the sale of the house?
We have heard conflictly answers on this. If one of the children understood correctly, the real estate attorney in MS handling the sale of the house said that since we didn't probate mom's estate after she died (including this property) the basis was what mom paid for the house. An Elder attorney years ago told us that when mom died and the Life Estate therefore would end, there would be a stepped up basis to the time of mom's death. (But nothing was said about needing to probate for that to be the case.) So what is the basis of the house sold, a stepped basis to when mom died or what mom had paid for the house
many years ago?
Question 2: If it does have a stepped basis, how do we determine what that was? Talk to a realtor and go back to see what comparable homes sold for in that area around the time of
mom's death four years ago and document that?
Question 3: Is any gain on the sale considered a capital gain? If the basis was what mom paid, there was a gain. If the basis was a stepped up basis at the time of her death, it would be a loss.
Question 4: On our tax returns, we put what we each received minus 1/3 of the basis?
Question 5: We had to pay state property taxes on the house for one year before it was sold. We split the cost three ways among ourselves and one of the children paid the tax bill. Are we allowed to deduct our 1/3 portion of those taxes on our tax returns if none of us lived in the house and didn't rent it for income? (We are checking to see if we can each get a receipt for our 1/3 portion of paying the property tax.) If so, on which form do we put that? One of the children doesn't own a house and deduct any property taxes. One does. And the other I think has Homestead Exemption on their house.
Question 6: At closing on the house, there were some taxes from the beginning of the year until the sale which were deducted from the sale proceeds. Are we able to deduct our 1/3
share of those taxes on our tax return somewhere and if so where?
Question 7: At closing on the house, there is a charge for title services, an additional document prep for seller and paying the city to pick up garbage, is 1/3 of these charges
deductions anywhere on a tax form and if so, where?
Question 8: One of the children replaced the roof on the house the year before the house sold and they were reimbursed for this during the sale transaction on the house (It is
documented on the documents). Is the 1/3 cost of that roof replacement a deduction on any tax form for each of us and if so, where?
ANSWER: Thanks for your question.
1. Your basis is the fair market value as of the date of her death.
2. You will have to do some research to determine the approximate FMV as of that date. A realtor can help, as can searching deeds in the county court house.
3. The gain is a long term capital gain/loss.
4. That is correct.
5. You can deduct the property taxes in the year paid. Schedule A.
6. Same as #5.
7. Reduces your proceeds, not deductible otherwise.
8. The cost of the roof would add to your basis.
Hope this helps.
John STancil, CPA
---------- FOLLOW-UP ----------
Thank you so much for all this information!
1. I want to be sure I understand the answer to question 7. So we would total the costs of title services, document prep and cost for the city to pick up garbage (which were all on our closing document) and would divide that by 3 and then subtract that amount from the amount of our proceeds listed on our 1099-S. Then that net amount of proceeds would be put on Schedule D against our 1/3 portion of the total basis to get gain or loss for long term capital gains?
2. I don't know if this question is out of what you can answer.
The three children live in three different states. I assume we each would
also pay state taxes where we reside on the sale. We don't need to also pay state taxes in MS where the house was sold, even though we don't live in that state?
That is correct on Question 7.
It depends on state law, most likely it is taxable in MS since the property is located there. You would file as a non-resident if it is taxable. It will also be taxable in your states of residence, but you can take a credit for tax paid to MS. I suggest you check with the Mississippi Department of Revenue.
John Stancil, CPA