Expert: Neil Johnson (The Tax Dude®) - 9/23/2007

Question
QUESTION: The home was originally purchased in 1977 by myself and my parents for 34,000. In 1980, I moved out. My name remained on the deed. In 1989, I became sole owner of the home and my father lived in the home until 2003. After a 3 years of improvements $$$, the home was sold this week for 96,000. After all the deductions/fees/agent costs, I walked away with 81,500. The monies are to be divided among 3 other siblings. What is my/our capital gains tax responsibility? How is the amount determined?  The assessed value was increase by the county from 49,000 to 62,000 this year. Any info will be appreciated.

ANSWER: Adam,

To better answer your question, I need some additional information from you.  First, how did you become the sole owner of the property in 1989.  Second if you were the sole owner, I don't understand why you are sharing the sale proceeds with your siblings.

FYI -  The assessed value by the county doesn't factor in the determination of taxable gain or loss on the sale of the property.  It's just a base figure the county uses to compute real estate taxes.

Regards,

Neil Johnson
The Tax Dude™
www.thetaxdude.com
taxdude@covad.net

---------- FOLLOW-UP ----------

QUESTION: Thanks for the quick response. In 1989, my mother passed away. I did a quick claim deed in order to place the home solely in my name. Later a lawyer said it wasn't necessary since my name was already on the deed. My father has very bad health issues with many, many hospital stays. It was to protect the asset and speed up the sale in case he too passed.
Sharing the proceeds is more of my mom's wish before her death. She wanted us to share the sale proceeds among us. It's a cultural thing.
My question of the assessed value by county is in regards to the difference from assessed value minus price it sold? Do I pay tax on the difference?  96,000-62000=34,000

Answer
Adam,

The taxable capital gain is computed like this.  You take the gross proceeds, subtract the cost basis and subtract the sales expenses (commissions, etc.).  The county assessed value as absolutely no relevance here.  The assessed value has to do with the computation of real estate taxes, not with income taxes.

The issue in your case is determining the cost basis.  First, you would need to know the original purchase price and cost of acquisition. Second, you will need to know the fair market value of the house as of the date of your mother's death.  Without knowing how the house was originally titled, I am going to assume you owned 1/3 in the beginning and your parents 2/3.  

Based on my scenario, your cost basis would be computed as follows:

1/3 of the original purchase price and cost of acquisition for your initial interest the property.  Plus, 1/3 of the fair market value of the property on the date of your mother's death.  Plus, 1/3 of the original purchase price and cost of acquisition for your father's interest in the property.  Plus, improvements made the last three years.

If you were wondering why there isn't an adjustment for your father's date of death, it is because you became sole owner of the property beforehand.  In essence, your father gifted his interest at that time.  Gifts carry the same cost basis of the donor.  

As you can see, this can be a little complicated.  I wish it were easier, but it's not.  I would make the following suggestions.  First, have a tax professional help you with your 2006 tax return.  Second, wait before distributing any monies to your siblings.

Since you will be bearing the entire burden of tax reporting and tax payments, it makes a lot of sense to figure out how much tax is going to be owed and adjust the proceeds accordingly.

If you like any more help with this, please feel free to e-mail me.

Regards,

Neil Johnson
The Tax Dude™
www.thetaxdude.com
taxdude@covad.net