Capital Gains Tax Owed?

[rico7684]

My wife and I live in the USA. My wife, a UK citizen and green card holder in the U.S., sold a house in London UK in October, 2019 that was co-owned by her and her sister. The house was originally her mother's, who deeded it to my wife & her sister in 2006. The house was originally purchased by her parents in 1958.

When the house sold in 2019, the proceeds were placed into a trust in the UK to pay for her mother's care as she was in a care home. Her mother recently passed and the remaining money is currently in two separate interest bearing funds in the UK that was used to pay for the care of her mother. We paid capital gains tax on the house sale in the UK in December, 2019 based on British tax law (expat sale of UK owned property), but did not receive any monies from the sale & thereby no benefit in the U.S. at that time.

In the near future, the remaining money will be divided 50/50 between my wife and her sister. My question is do we owe any capital gains tax in the U.S. and if so, what rate would apply? Our income level is in the 0% bracket for capital gains, but real estate transactions may be different based on my limited research.

 

[FlyingRon]

She owed capital gains to the US for 2019 based on the actual sale. The basis would be that of the parent. If there was some UK tax paid on the sale, that may qualify her for a foreign tax credit against the US tax. There's no provision for dodging the gain because of the trust or the lack of "benefit", When computing your tax rate for capital gains, you have to INCLUDE the capital gain in with any other income, so if the gain is over $78K then you do owe tax.

I'll assume your wife wasn't living in this house as personal residence in any of the past five years. If she did, she might be able to claim an exclusion for that.

 

[LdiJ]

My wife and I live in the USA. My wife, a UK citizen and green card holder in the U.S., sold a house in London UK in October, 2019 that was co-owned by her and her sister. The house was originally her mother's, who deeded it to my wife & her sister in 2006. The house was originally purchased by her parents in 1958.

When the house sold in 2019, the proceeds were placed into a trust in the UK to pay for her mother's care as she was in a care home. Her mother recently passed and the remaining money is currently in two separate interest bearing funds in the UK that was used to pay for the care of her mother. We paid capital gains tax on the house sale in the UK in December, 2019 based on British tax law (expat sale of UK owned property), but did not receive any monies from the sale & thereby no benefit in the U.S. at that time.

In the near future, the remaining money will be divided 50/50 between my wife and her sister. My question is do we owe any capital gains tax in the U.S. and if so, what rate would apply? Our income level is in the 0% bracket for capital gains, but real estate transactions may be different based on my limited research.

US citizens and green card holders do have to report their world wide income on their US tax return. However, if you are really in the 0% capital gains tax bracket that would result in 0 capital gains tax. Even if you are not in the 0% capital gains tax bracket you would still get a credit (up to your capital gains rate) on the tax you paid the UK for capital gains. Therefore unless the UK rate is really low, you shouldn't have much capital gains tax to pay the US.

 

[davew9128]

Who lived in the property?

 

[rico7684]

My wife's mother lived alone in the house until she went into a home, essentially from 2006 until 2018

 

[FlyingRon]

When you say "her" parents you mean your wife's grandparents? If so the basis steps up (for US purposes) to the value at the time of their (grandparents) death.

If your wife didn't live there, she can't claim the personal residence exclusion I mentioned at the end (and what DaveW is probably fishing for).

 

[rico7684]

I mean my wife's mother lived there, not her grandparents

 

[davew9128]

Sounds like a life estate to me but someone more familiar with UK law should be consulted.

 

[rico7684]

What is a life estate?

 

[FlyingRon]

A life estate is when a property is transferred but a person (usually the former owner) reserves the right to use the property why they are still alive. If such provision was made, then the basis becomes the value at the time that the person who had the life estate passed. This can make a substantial difference in the combustion of the basis.

Alas, it may not help you here because the property was sold before the mother passed. This would indicate that either there was no life estate or it was vacated.

 

[LdiJ]

A life estate is when a property is transferred but a person (usually the former owner) reserves the right to use the property why they are still alive. If such provision was made, then the basis becomes the value at the time that the person who had the life estate passed. This can make a substantial difference in the combustion of the basis.

Alas, it may not help you here because the property was sold before the mother passed. This would indicate that either there was no life estate or it was vacated.

I am dealing with a client with the same situation, except that the house in that case was located in the US. The parents are still living even now so no stepped up basis, and no exclusion because the siblings owned the house without living in it. Both of them own a primary residence. Both of them got a 1099-S

One of the big national chains (I won't say who) told the sister that she did not have to include the money in her income and that they could just send in an unformatted statement explaining that it wasn't really her money.

 

[rico7684]

Thank you for the information

 

[Taxing Matters]

Sounds like a life estate to me but someone more familiar with UK law should be consulted.

I'm not seeing anything that suggests a life estate was involved here. The facts stated were that the mother deeded the property to Rico's wife and sister. There isn't any suggestion that I see that the mother conveyed the property but reserved a life estate in the property. If you are thinking that the mother still living in it until it was sold would result in a de facto life estate even if the deed was not set up that way, that would take some digging into UK law to determine that.

The only difference that would make here is that if the mother truly held a life estate when the property was sold some of the proceeds should go to her as payment for her life estate interest and part of the basis would also get allocated to her for that interest, too. So the gain computation would get a bit more complicated.

There would be no step up in basis, though, because, as pointed out already by FlyingRon and LdiJ, the mother was still living when the home was sold.

But interestingly enough, even if the home had been sold after she died and she was a life tenant on the date of her death, there would still be no
step up in basis in this instance if the mother was not a U.S. citizen or resident. The basis step up for a life estate is provided by IRC § 1014(b)(9). In order for the property to qualify it must be "required to be included in determining the value of the decedent's gross estate" for the federal estate tax. But real estate interests owned by a nonresident alien that are outside the U.S. are not included in determining the value of the decedent's gross estate for federal estate tax. Thus, there would no basis step up here even if the mother held a life estate in the property at her death.

 

[rico7684]

Thank you everyone for your information and assistance, much appreciated.

So, we would owe taxes, both NYS and Federal, on the sale, from the 1958 purchase date to the sale price in 2019? Also, our federal tax rate based on our sole income of a NYS pension, lies in the 0% bracket of less than $80,000 joint filing and I do not pay NYS tax on my pension as I am exempt as a NYS resident.

What would be the Capital Gains tax rate(s) for the sale based upon these factors?

 

[FlyingRon]

I'll state again, the value of the GAIN is included in the income used to determine the capital gains rate, so if your wife's share of the gain PLUS any other income is more than $78,750, you're moved up into at least the 15% rate.