How do you determine the capital gains amount on the sale of a non-primary residence house

[Lot249]

State: New Jersey

Major factors surrounding property sale:

House built by parents in 1972, value.........$40,000;
House gifted to children (2) in 1994, parent retaining life rights ...... house value ....... ?
Projecting house sale in 2020, estimated house value .... $300,000 - $340,000;
The results of sale will be shared equally by children.

Is the capital gains amount simply determined to be the difference between the current house value and the estimated house value in 1994, less existing leans? If so, is the tax determined on the first capital gains dollar?
Thank you.

 

[ShyCat]

Since the children received the house as a gift rather than an inheritance, there is no step up in basis. Their basis in the house is the same as their parents (i.e., $40,000 plus any capital improvements). Capital gains is not reduced by any mortgage payoff. For a simplified example, if there were $10,000 in improvements and the mortgage payoff is $100,000 with a sale price of $340,000 and selling expenses of $12,000,...

The basis is $40,000 plus $10,000 = $50,000.
The capital gains is $340,000 - $12,000 - $50,000 = $278,000.
Net proceeds is $278,000 - $100,000 = $178,000.

 

[Taxing Matters]

State: New Jersey

Major factors surrounding property sale:

House built by parents in 1972, value.........$40,000;

The value in 1972 is meaningless. What was the purchase price they paid? And what was the cost of any improvements that have been made since?

House gifted to children (2) in 1994, parent retaining life rights ...... house value ....... ?

This is incredibly important: did they reserve an actual life estate in the property? What is the actual language in deed that describes the rights the parent retained? And has the parent died, and if so, when?

Since the children received the house as a gift rather than an inheritance, there is no step up in basis.

No. We are missing a couple of key pieces of information. If the parent reserved a life estate in the property and the parent has since died that would make a huge difference here.

 

[Lot249]

The value in 1972 is meaningless. What was the purchase price they paid? And what was the cost of any improvements that have been made since?


This is incredibly important: did they reserve an actual life estate in the property? What is the actual language in deed that describes the rights the parent retained? And has the parent died, and if so, when?


No. We are missing a couple of key pieces of information. If the parent reserved a life estate in the property and the parent has since died that would make a huge difference here.

Yes, the deed does reflect the parent's "life rights to the property". The parent has recently passed.

 

[LdiJ]

Yes, the deed does reflect the parent's "life rights to the property". The parent has recently passed.

Then you do get a stepped up basis to the FMV as of the date your parent passed away.

 

[Taxing Matters]

Then you do get a stepped up basis to the FMV as of the date your parent passed away.

It's not that easy. The OP will need to see a real estate or probate attorney to confirm that the parents retained a life estate in the property, unfortunately. The OP didn't provide the entire grant section of the deed, which we need to determine what rights the parents actually had. The term "life rights to property" might mean several different things depending on exactly what else was said and the applicable state law. It would have been far better had the deed specifically referred to retaining a life estate. We also don't know which parent owned the property; if only one parent was living in 1994 and that parent is the one who created the life estate that will make it easier than if two parents were involved.

 

[Lot249]

The transfer of ownership (deed) reflects my father's name and the date of my father's death and states "leaving his wife, the grantor herein, the surviving tenant by the entirety". Further down, the document states "this conveyance is subject, however, to a life estate on the life of the grantor. The said life tenant shall be responsible for the taxes, maintenance. and general upkeep of the premises". Does this information support consideration for the "stepped-up basis" to the FMV. Your input is most appreciated, thank you.

 

[Taxing Matters]

The transfer of ownership (deed) reflects my father's name and the date of my father's death and states "leaving his wife, the grantor herein, the surviving tenant by the entirety".

I assume that is in a part of the deed reciting the history of conveyances prior to your mother then transferring it to the children in that same deed, correct?

Further down, the document states "this conveyance is subject, however, to a life estate on the life of the grantor. The said life tenant shall be responsible for the taxes, maintenance. and general upkeep of the premises". Does this information support consideration for the "stepped-up basis" to the FMV. Your input is most appreciated, thank you.

If my assumption above is correct, then in the transfer to the kids the mother reserved an actual life estate, not just some nebulous "lifetime rights". And in that case there is indeed a step up in basis to fair market value (FMV) on her death. This is why looking at the exact language matters.

 

[Lot249]

Thanks for your input. The quoted language is exactly as it is written in the deed. Thank you again for your help.