Confusing These Rules Can Cost You

A parent has owned a home for a long time, and their purchase price plus improvements is much less than a current sales price. A broker called me to tell me that they had a problem. “To avoid probate, the mother had put the daughter on title as a joint tenant. Upon death the daughter would inherit the property.”

Now, the mother wants to sell and use her $250,000 Exclusion of Capital Gain. However, the daughter now owns half of the property. When the property was gifted, there is another rule. Basis follows a gift. So the daughter’s half had the low basis of half of the purchase price. In a sale the daughter cannot claim the Exclusion, so she will pay some tax.

If they transfer the property back to the mother, the mother will only be able to exclude gain on half of her sale. She has not been on the title on the daughter’s half for the last two years.

Another scenario: Mother and father were going into an assisted living arrangement and put their two children on title. The children get the basis at time of transfer and if they sell, they pay tax with no exclusion.

When does basis go up to fair market value? At time of death, and that is one rule to remember. Real Estate Professionals: When you hear of a client’s parent passing away, you might want to send them a CMA as this might illustrate to the IRS the value at time of death.

Conclusion: Before ever gifting any real estate, talk to a Real Estate Tax Professional, not the next door neighbor or work associate or Seminar Speaker who thinks they know tax rules.

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