ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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Look at your deed to determine how "title" to your house was held. If title was held as joint tenants, then he owned 50% of the residence and only this portion ($150,000) would have received a basis step-up to fair market value. Your basis then would be $200,000, calculated as follows: Your original 50% interest worth $50,000 (1/2 of the original basis), plus your husband's 50% interest worth $150,000. A sale for $500,000 will produce a $300,000 capital gain.
If, however, the property was held as community property, then both your share and your husband's share would have received a basis step-up to fair market value at the time of his death and your basis would be $300,000. Consequently, a sale of $500,000 would generate a $200,000 capital gain.
In either case, if you are over age 55 and have lived in the house at least 3 of the last 5 years prior to the sale (or 1 of the last 5 years if you were residing in a nursing home or a similar facility), then you could be eligible for a once-in-a-lifetime capital gains exclusion of $125,000; provided, in general, that neither you nor your late husband (or a spouse from a former marriage) previously used this exclusion.
Note: Both President Clinton and Presidential candidate Bob Dole have tax proposals that would eliminate taxes on the first $250,000 of gain. Under Clinton's proposal, married couples filing jointly could exclude up to $500,000. Dole's proposal limits the exclusion to $250,000 for joint filers during the first 10 years of ownership; however, his exclusion grows to $500,000 (at the rate of $25,000 per year for years 11 through 20) for married couples owning their homes for 20 years. Under both proposals, the once-in-a-lifetime exclusion would be repealed. Of course, Congress would still have to approve such legislation.
The lesson is clear: Married couples should hold their appreciated property and assets as community property, rather than as joint tenancy. The income tax consequences of joint tenancy can cause a needless financial burden for the surviving spouse.
The deed states whether your father placed you on title as a joint tenant (you receive a current interest in the property, but the survivor becomes the sole owner) or gave you a "remainder interest" (he remains the owner during his life, but you became the owner upon his death). In both cases, you will receive the entire property at his death, but the tax consequences can be drastically different.
As a joint tenant, generally you will receive a full stepped-up basis at your father's death so the later sale of the property will generate a capital loss of $20,000. Your father's estate would include the entire value of the property for estate tax purposes. This would be true if your father retained the life estate until his death.
If, however, your father makes a gift of a remainder interest in the property (which is usually the case when he retains the property for the rest of his life) and then gifts the life estate to a third party prior to his death, then you received a carryover basis (your father's basis in that interest) rather than a fair market value basis. In either case, your father may have incurred a tax gift at the time of his transfers.
To illustrate the tax consequences, assume the remainder interest was worth 50% of the property's value at the time of transfer. (Remainder interests are valued using IRS life expectancy tables.) Your carryover basis would be $50,000 (50% of your father's basis) and a later sale for $180,000 would generate a capital gain of $130,000, rather than a capital loss of $20,000.<
Your question illustrates the dangers in making property transfers and changes in title without careful consideration of the gift and estate tax consequences. Generally, it is a bad idea to gift appreciated property (real estate, stocks) prior to death, because the recipient will owe capital gains taxes on the entire appreciation when it is later sold. Gifts of cash or property that has not appreciated will eliminate this problem.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**