Capital Gains Tax

[Snowflakey]

Before I begin let me state that I will be consulting a tax professional however I thought I'd run it by my DIS friends to see if anyone has dealt with this.

My mother passed away last September, her home was left to me, my sister and my step father in a "survivorship deed". My step father just passed away and now my sister and I are going to sell her home.

How does capital gains tax work? I really don't have any knowledge and I've read so many conflicting things with some saying you won't have to pay anything and others saying you do. I want to make sure I'm prepared and ready for anything I will owe.

Thanks in advance!

 

[kymom99]

My siblings and I inherited our parents’ property snd we didn’t pay any capital gains.

 

[DCLMP]

Before I begin let me state that I will be consulting a tax professional however I thought I'd run it by my DIS friends to see if anyone has dealt with this.

My mother passed away last September, her home was left to me, my sister and my step father in a "survivorship deed". My step father just passed away and now my sister and I are going to sell her home.

How does capital gains tax work? I really don't have any knowledge and I've read so many conflicting things with some saying you won't have to pay anything and others saying you do. I want to make sure I'm prepared and ready for anything I will owe.

Thanks in advance!

It depends on the state. My mother passed away last year and her state had no inheritance tax. There's only a handful of states that do Iowa , kentucky, NJ, Nebraska and Penn. We paid no tax. If the money's in a IRA that's a different story. You have ten years to cash out and pay the tax.

 

[Snowflakey]

It depends on the state. My mother passed away last year and her state had no inheritance tax. There's only a handful of states that do Iowa , kentucky, NJ, Nebraska and Penn. We paid no tax. If the money's in a IRA that's a different story. You have ten years to cash out and pay the tax.

Interesting. I'm not in any of the states you listed above. My sister said she spoke to her tax person and they said we do have to pay but I could of swore I remember my mothers attorney from years ago saying you don't have to pay them since it is an inheritance.

 

[DCLMP]

Interesting. I'm not in any of the states you listed above. My sister said she spoke to her tax person and they said we do have to pay but I could of swore I remember my mothers attorney from years ago saying you don't have to pay them since it is an inheritance.

That is correct. Your parents already paid tax on the money you are inheriting. If you inherit money that they haven't paid tax on like a IRA or 401k than there are different rules.

 

[Christine]

In simplest terms:
If you inherit property or assets, as opposed to cash, you generally don't owe taxes until you sell those assets. These capital gains taxes are then calculated using what's known as a stepped-up cost basis. This means that you pay taxes only on appreciation that occurs after you inherit the property.

So if you inherited the house on November 1st and you sell it a few months later, there's probably no noticeable appreciation. It would be problematic if YEARS ago. Of course, this can all vary by states.

When my FIL died, we sold his house a few months after his death and had no tax to pay.

 

[kymom99]

In our case, the estate sold the property. My brother was in charge and liquidated the assets then he filed taxes on the estate. We didn’t pay anything.

 

[TAX GUY]

After you consult with your tax professional, you should get a similar answer....


You will have what they call "stepped up basis", which should be the FMV (Fair Market Value) at the date of death (or the date inherited). Added to that basis would be any additional costs incurred to prepare the home for sale (repairs, commissions, fees, etc). The sale price less the basis would be your gain, taxed at the corresponding long term rates based on your total tax situation. HOWEVER, in many cases if the property is sold close to the date of inheritance and the market stays stable within that time frame, there would typically be NO gain as the FMV and sale price should be close to one another.

Your sister may want to further discuss her "tax person" stance and ask why they feel there's a taxable gain.

 

[starry_solo]

You should contact your own tax professional and possibly estate attorney. Did your stepfather have any heirs? Has the estate been probated?

 

[Snowflakey]

After you consult with your tax professional, you should get a similar answer....


You will have what they call "stepped up basis", which should be the FMV (Fair Market Value) at the date of death (or the date inherited). Added to that basis would be any additional costs incurred to prepare the home for sale (repairs, commissions, fees, etc). The sale price less the basis would be your gain, taxed at the corresponding long term rates based on your total tax situation. HOWEVER, in many cases if the property is sold close to the date of inheritance and the market stays stable within that time frame, there would typically be NO gain as the FMV and sale price should be close to one another.

Your sister may want to further discuss her "tax person" stance and ask why they feel there's a taxable gain.

Thanks Tax Guy - another wonder of mine is when was it inherited so to speak.....the deed was a survivorship deed and my step dad just passed. However, mom passed away last September so I'm assuming that is the date we work with?

 

[Snowflakey]

You should contact your own tax professional and possibly estate attorney. Did your stepfather have any heirs? Has the estate been probated?

No probate needed for my moms estate as the house was already deeded to us (per the estate attorney)

 

[TAX GUY]

Thanks Tax Guy - another wonder of mine is when was it inherited so to speak.....the deed was a survivorship deed and my step dad just passed. However, mom passed away last September so I'm assuming that is the date we work with?

No, he has his basis plus half of hers when he was the survivor. Yours (you and your sister) would/should be at his DOD.

 

[mefordis]

No probate needed for my moms estate as the house was already deeded to us (per the estate attorney)

Is that how you avoid probate? By putting the names of the heirs on the assets and bank accounts?

 

[china mom]

It depends on the state. My mother passed away last year and her state had no inheritance tax. There's only a handful of states that do Iowa , kentucky, NJ, Nebraska and Penn. We paid no tax. If the money's in a IRA that's a different story. You have ten years to cash out and pay the tax.

Inheritance tax and capital gains taxes are two different topics. Even if there is no inheritance tax, if you inherit a house valued at $100K, hold it for a year and then sell it for $150K, you would owe capital gains tax on the $50K increase in value.

Now, Tax Guy, correct me if I am wrong but since three entities inherited the house when the mother dies and then two entities inherited 1/3 interest when the step father died, wouldn't some states tax the capital gains on part of the gain and only the step father's interest would have the stepped up basis? (not a tax person but I did sleep in a Holiday Inn last night)

Edited - you seem to have answered this while I was typing my question

 

[china mom]

Is that how you avoid probate? By putting the names of the heirs on the assets and bank accounts?

Yes and no. If both names are on the asset, it does not have to go through probate BUT, you potentially lose control of that asset. And, you lose the benefit of the stepped up basis. If you put your childs' name on your house and it increases in value, say $200K, the child would only get half of the stepped up basis at the time of your death. So when they go to sell it, they would owe capital gains tax on $100K even if they sell right away. Capital gains tax on $100K is usually much more than the probate costs would have been.

Now consider the loss of control of the asset. Say I put the house in my childs name (either with me or on his own). A loving, wonderful, honest child. But say he marries an evil controlling witch, or develops a substance abuse problem or none of that but he gets sued and loses, my home is now at risk. Also, what if I would like to sell the house and he disagrees, I cannot sell it without his signature.

I know we all love the people who are kids are today but you can't count on them being that same person down the road. my kids are still young (and perfect) but I have seen it in other families.

My husband and I own everything jointly (except for three cars that I goofed up on and bought without his name on the title) but I won't put my kids on the titles, deeds or bank accounts.

You can name them as a survivor beneficiary on bank accounts and cars and avoid probate but I don't think houses work the same way (feel free to correct me if I am wrong).

And NEVER let your 401K go tot he estate. Make sure you have beneficiaries listed with what percentage goes to each.

 

[tvguy]

If the money's in a IRA that's a different story. You have ten years to cash out and pay the tax.

Well, it just depends on when the IRA was started, and if and when distributions had been started.
My wife and rolled our 401k's into IRA's when we retired last year. So when one of us dies, the other's IRA balances go to the surviving spouse with no tax due. When the second of us passes, our kids will have to cash out the IRAs and pay taxes within 10 years.
Now, when my mom died in 2013, the rules when she started mandatory minimum distributions from that account back in 1993 said the heir to the account has the option of cashing out the IRA and paying taxes, or continuing the annual mandatory minimum distributions at the same rate at the account holder was getting. That is what I am doing. I get a check once a year for the same amount my mom was getting, and I have to pay taxes on that amount. I NEVER have to cash in the account. And given the return the conservative investments the past 10 years, the balance keeps growing because the distributions are less that what the investments are earning. I do have the OPTION of taking out the entire sum, and of course I would have to pay taxes on that amount.
And of course, CONGRESS could change things . When I opened my first IRA in 1979 the law allowed you to withdraw, without penatly, money form an IRA to buy a home, car, pay for College Tuition, or Medical Expenses. Too many people started taking advantage of that, and Congress saw too much tax money getting away and eliminated those options.

 

[DCLMP]

Well, it just depends on when the IRA was started, and if and when distributions had been started.
My wife and rolled our 401k's into IRA's when we retired last year. So when one of us dies, the other's IRA balances go to the surviving spouse with no tax due. When the second of us passes, our kids will have to cash out the IRAs and pay taxes within 10 years.
Now, when my mom died in 2013, the rules when she started mandatory minimum distributions from that account back in 1993 said the heir to the account has the option of cashing out the IRA and paying taxes, or continuing the annual mandatory minimum distributions at the same rate at the account holder was getting. That is what I am doing. I get a check once a year for the same amount my mom was getting, and I have to pay taxes on that amount. I NEVER have to cash in the account. And given the return the conservative investments the past 10 years, the balance keeps growing because the distributions are less that what the investments are earning. I do have the OPTION of taking out the entire sum, and of course I would have to pay taxes on that amount.
And of course, CONGRESS could change things . When I opened my first IRA in 1979 the law allowed you to withdraw, without penatly, money form an IRA to buy a home, car, pay for College Tuition, or Medical Expenses. Too many people started taking advantage of that, and Congress saw too much tax money getting away and eliminated those options.

I have 10 years to liquidate my moms IRA unless laws change.

 

[Snowflakey]

No, he has his basis plus half of hers when he was the survivor. Yours (you and your sister) would/should be at his DOD.

Thanks again. The home should be sold/closed in about 2 months after his death.

 

[Colleen27]

I have 10 years to liquidate my moms IRA unless laws change.

Yep. The rollover option that keeps the money in a tax-deferred status is limited to spouses; any other heir needs to liquidate within 10 years and pay the taxes. The other rule TVGuy described, regarding his mother's account, was phased out quite a while ago.

As far as the house goes, I inherited my mother's house early this year but my lawyer said the stepped up basis is the value assigned by probate. So there won't be capital gains taxes on the sale proceeds unless in appreciates significantly from that point until the sale, which I doubt will be an issue given the near-term predictions for the real estate market.

 

[Snowflakey]

Is that how you avoid probate? By putting the names of the heirs on the assets and bank accounts?

My mother had updated her deed to her home years ago with rights of survivorship. She also added me to her savings/checking account. By doing that, those accounts became mine so to speak once she passed. Her 401K had beneficiaries so the only thing that was in her estate so to speak were her belongings and her car.

I know some worry about that but DH and I will be doing the same thing with our home to our 2 daughters. I will also add one to my checking account when I'm closer to retirement (10 years or so). It made things SO MUCH EASIER to deal with once Mom passed and not having to go through probate court. She passed suddenly so the pre-planning she did was appreciated, especially while mourning my loss.