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Tax Law (Questions About Taxes)/Property inheritance tax liability

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Question
In 1998 after my wife's mother passed away her father set up a joint tenancy of the family home with himself, my wife, and her sister as joint tenants. The home had been purchased more than forty years earlier in the 1950s. He has recently passed away.  The house today is worth between $250,000 to $300,000 and my wife and her sister intend to sell it.  The home and all of us are in CA.  Is there any federal or state income tax on their respective half shares of whatever the sale price is?  If a gain is the only taxable portion is it based on the value of the home at the time of his death - or would it be based on the value of the home in 1998 when the joint tenancy was created? Lastly, in terms of tax implications do they need to complete the sale within a certain time limit - such as one year - in order to prevent themselves from higher taxes - independent of any further increase in value and sale price?

Answer
Joe,

Thanks for your question.  That's a complex basis calculation you have come up with. Just for what it is worth, your wife and her sister would have had little or no tax liability if their father had kept the title in his name only, and they inherited the entire house.

This is best illustrated through an example.  Let's assume they purchased the house in the 50's for $10,000. When her mother passed away, their father inherited her half.  Assume the FMV at that time was $110,000. Half of that was inherited, so his basis is now $5,000 + $55,000 = $60,000. That is his original half plus the inherited half.

Then he gives an interest in the house to your wife and her sister.  When a gift occurs, the donee receives a transferred basis in the property gifted.  Since his basis was $60,000 each of them have a $20,000 basis in their share of the house.

When he died, the sisters inherited his 1/3 of the house.  Assume that the FMV on the date of his death was $240,000.  His one third is $80,000 so each sister adds $40,000 to their basis.  $40,000 + $20,000 =$60,000 is the basis each has in the house.

When the house is sold they will have to pay tax on the sale price minus costs of sale less their basis of $60,000.  So if the house is sold for a net $250,000 each of them gets $125,000. Subtract their basis, and they pay tax on $65,000. This will be taxed at the capital gain rate.

The only effects of a delay in the sale are 1) change in the gain due to increasing or decreasing prices, or 2) An increase in the capital gain tax rate.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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