Capital Gains from Sale of Primary Residence in Trust

[Shadowbunny]

Arizona

Hi All;

It's likely that my elderly Mother will soon need to go into a Memory Care facility, as it's been determined she can no longer live on her own.

Background: Her home (that she owned with my late father since 1959) is paid off. In the late 90s, she and Dad had a trust created; the house was titled in the name of the trust at that time. Dad passed in 2006. In 2017 she had the trust revamped to meet the requirements of current AZ laws. I was named Durable POA, Financial POA, & Healthcare POA during that revamp. House is likely worth in the $300,000 range.

So here's the question: what are the tax implications if we sell the home prior to Mom's passing in order to pay for her care? Will that saddle her with a big tax bill?

@Taxing Matters -- thoughts?

 

[adjusterjack]

What was the purchase price in 1959? $10,000? $15,000.
They must have made some major improvements in 40 years. Add the cost of those of those improvements to the purchase price. That total should be her basis.

Take the sale price. Subtract the cost of sale (commissions, etc).

Take that result and subtract $250,000 (her main home exemption).

What's left is her taxable gain. I'll bet it's not much and whatever the tax bite is, you have a year to put aside the money to pay it.

If her only income is Social Security, it's not taxable by fed or AZ and the standard deduction for 2023 for those over 65 is going to increase to about $15,000 and should come pretty close to covering any tax on the sale of the home.

And isn't the cost of Memory Care facility deductible on her taxes if her money pays for it? Might not apply if you are paying and taking her as a dependent.

If I've missed anything, Taxing Matters will certainly come to the rescue.

 

[Shadowbunny]

Hey Jack!!!!

You're spot-on that they've made improvements since 1959, including an addition to the house. Don't know how we'll determine how much they paid for an addition that was done in 1981, but I'm sure there's someone, somewhere that can do a guesstimate.

You're also right that her only income is SS; that's about $2k a month. She has approx $60k in the bank, but between home health care we have coming now and the roughly $4 - 5k a month we expect to pay for residential care, that will get eaten up pretty quickly.

But wow... that makes me feel better. Thank you!

 

[adjusterjack]

You're spot-on that they've made improvements since 1959, including an addition to the house. Don't know how we'll determine how much they paid for an addition that was done in 1981, but I'm sure there's someone, somewhere that can do a guesstimate.

I'm guessing there are no papers about the build?

A couple of things come to mind.

Check with the building department for the permit record. The application may be on microfiche and might provide an estimate of the job cost. Every garage I've ever built since 1980, the permit office stuck a price on the permit for computation of the permit fee.

Or, if they took out a loan for the project, the loan contract might have been recorded.

See if you have before and after photos and show them to a contractor who has been in business since 1980 and he might be able to ballpark it. I don't imagine that it cost more than a few thousand to add a room 40 some odd years ago. Probably not significant enough for the IRS to question an off-the-cuff estimate.

Might not even need to be concerned about it once you do the figuring without the addition.

You're also right that her only income is SS; that's about $2k a month. She has approx $60k in the bank, but between home health care we have coming now and the roughly $4 - 5k a month we expect to pay for residential care, that will get eaten up pretty quickly.

No tax on the SS and I'm guessing her medical and standard deductions will eliminate any tax on the gain from the sale of the home even without computing the improvements.

 

[Taxing Matters]

Arizona

Hi All;

It's likely that my elderly Mother will soon need to go into a Memory Care facility, as it's been determined she can no longer live on her own.

Background: Her home (that she owned with my late father since 1959) is paid off. In the late 90s, she and Dad had a trust created; the house was titled in the name of the trust at that time. Dad passed in 2006. In 2017 she had the trust revamped to meet the requirements of current AZ laws. I was named Durable POA, Financial POA, & Healthcare POA during that revamp. House is likely worth in the $300,000 range.

So here's the question: what are the tax implications if we sell the home prior to Mom's passing in order to pay for her care? Will that saddle her with a big tax bill?

@Taxing Matters -- thoughts?

If you sell it before she dies, she should qualify for the full $250,000 of gain exclusion. The net gain will be less than $300,000 with sale expenses, etc. It may be that the gain will be minimal. Bear in mind that half the house got an increase to basis when your father died if they owned it as joint tenants. But if they lived in a community property state and held it as community property when he died the entire home will get a step up in basis as of the date he died. So if the house had increased a lot by 2006, she may well qualify for the entire gain exclusion and would not owe the IRS a penny. I don't know, however, if her state would follow that treatment. It's not clear to me where she lives so I don't know what state tax rules would apply. For the federal tax rules on the sale of the home in great detail see IRS Publication 523.

 

[Shadowbunny]

Thanks, Taxing!

They have lived in AZ since '58 which is a community property state. So if I understand correctly, that means the new basis is the year that Dad died? The housing market has increased quite a bit since he passed, so I'm hoping she wouldn't owe a thing. Every dollar we save in taxes is more we can spend on Mom, so I"m getting pretty frugal!

 

[Taxing Matters]

Thanks, Taxing!

They have lived in AZ since '58 which is a community property state. So if I understand correctly, that means the new basis is the year that Dad died?

If they owned it as community property (and they likely did as that's the most common form of property ownership for married couples in that state) then the basis of the entire home would be the fair market value of the home when your father died, instead of just get half the basis boosted to FMV when he did as would occur with joint ownership. Still, it's a good idea to the nature of ownership of the property at wherever deeds are recorded for the county where the house is. She'd then make adjustments from there for any substantial improvements, etc, made after his death. That all could considerably increase the basis in the home, and along with the capital gain exclusion for the sale of a principal residence may well mean no federal tax for her on the sale.

 

[LdiJ]

Thanks, Taxing!

They have lived in AZ since '58 which is a community property state. So if I understand correctly, that means the new basis is the year that Dad died? The housing market has increased quite a bit since he passed, so I'm hoping she wouldn't owe a thing. Every dollar we save in taxes is more we can spend on Mom, so I"m getting pretty frugal!

Her federal Capital Gains Exclusion is 250k. You said the property is worth 300k If the basis plus improvements plus selling expenses is 50k or more, she is not going to have to pay any capital gains tax. Since at least 50% of the property got a stepped up basis when you father died (and probably all of it), I don't think that there is any real chance that her basis could be less than 50k, therefore no real chance of her paying any capital gains tax.

 

[adjusterjack]

General consensus:

NO TAX

YAY!

 

[Shadowbunny]

Thank you ALL for your input. You have made this whole situation a lot less stressful!

 

[davew9128]

If her only income is Social Security, it's not taxable by fed

Well that's not true...Edit: Only if literally no other income is it true.

 

[LdiJ]

Well that's not true...Edit: Only if literally no other income is it true.

A surprising number of people have only SS benefits.

 

[davew9128]

A surprising number of people have only SS benefits.

I'll take your word for it.

 

[Bali Hai Again]

A surprising number of people have only SS benefits.

Yup, I watched my grandparents live on SS and those that can’t survive on SS benefits alone (which would be rare today) and have other income, the SS benefit is taxed up to 85% (might as well call it 100%). As Gomer Pyle used to say: surprise, surprise, surprise!

 

[adjusterjack]

If her only income is Social Security, it's not taxable by fed

Well that's not true...Edit: Only if literally no other income is it true.

Kind of shot yourself in the foot there.

A surprising number of people have only SS benefits.

I'm one.

I live quite nicely on it.