Tax on sale of deceased father's condo

[MikeInAA]

What is the name of your state? Virginia

The property in question is in Virginia, but I live in Michigan.

My father passed away in March 2007. In January 2008, my bother (lives in VA) and I sold our father's condominium. The value at the time of his death was about $240K, but we sold it at $190K. Initially we thought that we wouldn't have to pay 2008 capital gains on the sale because it decreased in value from the time we had control until we sold it. However, our real estate agent warned us that because our father had our names on the deed, it may not be so simple. In fact, our names had been on the deed for at least five years, and probably more. What guidance can you provide on how to deal with this come tax time next year?

Thanks in advance for the assistance!

[ShyCat]

Your father made a gift when he added your names to the deed. Therefore, you do not get the step up in cost basis that occurs if you had inherited the condo upon his death. Instead, your cost basis for the condo is the same as your father's (e.g., purchase price plus cost of improvements). Unless you lived in the condo for two of the last five years before selling it, you and your brother will only be able to exclude up to $250,000 each of capital gains. Depending on sale price and cost basis, that may not be an issue for you at all... or it may be an expensive one.

Your father should have filed a gift tax return when he gifted the condo to you and your brother. No gift tax would be likely since there is a $1,000,000 lifetime exclusion. However, the estate tax exclusion is also reduced by the FMV of the gift.

[LdiJ]

Originally Posted by ShyCat

Your father made a gift when he added your names to the deed. Therefore, you do not get the step up in cost basis that occurs if you had inherited the condo upon his death. Instead, your cost basis for the condo is the same as your father's (e.g., purchase price plus cost of improvements). Unless you lived in the condo for two of the last five years before selling it, you and your brother will only be able to exclude up to $250,000 each of capital gains. Depending on sale price and cost basis, that may not be an issue for you at all... or it may be an expensive one.

Your father should have filed a gift tax return when he gifted the condo to you and your brother. No gift tax would be likely since there is a $1,000,000 lifetime exclusion. However, the estate tax exclusion is also reduced by the FMV of the gift.

Most of that is not correct.

If they were added to the deed, then they would not get a stepped up basis for their share of the condo, but they would get a stepped up basis for their father's share.

[MikeInAA]

Thanks for your replies.

I'm really not sure when we were added to the deed, but it sounds like timing doesn't matter in this case. We were probably added shortly after our mother passed away about nine years ago.

When you say that my brother and I would get a stepped up basis for our father's share, what exactly is his share in this case? 1/3? And, how would I compute the stepped up basis?

Thanks again...

[LdiJ]

Originally Posted by MikeInAA

Thanks for your replies.

I'm really not sure when we were added to the deed, but it sounds like timing doesn't matter in this case. We were probably added shortly after our mother passed away about nine years ago.

When you say that my brother and I would get a stepped up basis for our father's share, what exactly is his share in this case? 1/3? And, how would I compute the stepped up basis?

Thanks again...

It depends on how the deed was titled. It could very possibly be 1/3 for each of you, or it could be that your father gave you and your brother your mother's 1/2, so that each of you got 1/4.

Example at all 1/3rd's:

Dad's basis in the home was 120k. The home sold for 180k.

You and your brother each had a basis of 40k (120k/3) in your 1/3, and then dad's 1/3 had a stepped up basis to 60k, so the two of you would each have another 30k in basis, for a total of 70k. The home sold for 180k, or 90k for each of you. Each of you has a 20k capital gain. You will each pay 15% capital gains tax on that 20k, or 3500.00.

[ShyCat]

Most of that is not correct.

On the contrary, most of it was correct. One omission only, as you noted:

If they were added to the deed, then they would not get a stepped up basis for their share of the condo, but they would get a stepped up basis for their father's share.

I'll be more careful next time.

[tranquility]

Shy Cat wrote:

On the contrary, most of it was correct. One omission only, as you noted:

Well, except for the incorrect portions, such as:

Your father made a gift when he added your names to the deed. Therefore, you do not get the step up in cost basis that occurs if you had inherited the condo upon his death.

Father made a gift at the time the names were added. The *gifted* portion does not get a step up at death.

Unless you lived in the condo for two of the last five years before selling it, you and your brother will only be able to exclude up to $250,000 each of capital gains.

OOhh...that one's going to hurt. Let's change the "Unless" to "Only" and completely seperate you and your brother's facts. More facts would be needed, but this sentence is so wrong and fuzzy to be worse than mere bad advice.

Your father should have filed a gift tax return when he gifted the condo to you and your brother.

Probably.

No gift tax would be likely since there is a $1,000,000 lifetime exclusion.

OK.

However, the estate tax exclusion is also reduced by the FMV of the gift.

Hmm...I'd say this is not correct due to timing issues. The FMV of the gift is not going to "reduce" the estate tax exclusion. I'd say the *current* FMV of the gifted property (not the FMV at the time of the gift) is not included in the estatetax exemption--because it is not *in* the estate. I wouldn't put it this way at all. It is confusing and, incorrect, because property not in the estate has no relation to the estate tax. I think I can twist my head around what is being meant, but twisting the night away does not make something correct. Not only is the specific information wrong, it is worded so awkardly so as to make the wrong idea flow to the reader. Being mostly correct (a huge stretch in your posting) is not that useful. I've heard that 99.999% of all posters to freeadvice are idiots. (That sentence is "mostly" correct, the reader can adjust whichever section is incorrect.)