Gain on gifted property

[ILLMAS]

Learned this today from a client, TP's father quick claimed property to TP and property was to be divided between siblings many years ago, siblings did not want to do anything with the property with exception of one brother and the arrangement was that the TP and brother would go 50/50 on all expenses of the house.  Apparently, TP has assumed 100% of the responsibility of maintaining the house since day one and now would like to sell the property.  The 2 flat house has been used as the primary home for the TP and brother, I am aware that her basis would be the original cost to the father or FMV at the time of the transfer, but would there be a gain if the house estimated value was 15-20K at the time of transfer and is now worth 240K?  No gift tax was ever paid as far as I know.

Thanks

[Jack from Ohio]

34 minutes ago, ILLMAS said:

Learned this today from a client, TP's father quick claimed property to TP and property was to be divided between siblings many years ago, siblings did not want to do anything with the property with exception of one brother and the arrangement was that the TP and brother would go 50/50 on all expenses of the house.  Apparently, TP has assumed 100% of the responsibility of maintaining the house since day one and now would like to sell the property.  The 2 flat house has been used as the primary home for the TP and brother, I am aware that her basis would be the original cost to the father or FMV at the time of the transfer, but would there be a gain if the house estimated value was 15-20K at the time of transfer and is now worth 240K?  No gift tax was ever paid as far as I know.

Thanks

Yes

[Abby Normal]

And it's a 'quit claim' deed not 'quick claim'.

[ILLMAS]

Darn autocorrect, I hate when that happens.

[SaraEA]

Often when a person gifts his home to the kids the transfer docs state he has the right to live there for life.  This is called a retained life estate.  If there are no such docs, but the person lived there and paid the bills, taxes, etc., there is an implied retained life estate.  In both cases the full value of the home is counted in the person's estate when he dies, and the heirs get step-up basis.  If the parent didn't die but permanently moved out (like to a nursing home), then you have to calculate the value of the retained life estate and the value of the gifted portion using actuarial tables the IRS publishes.  It's complex!  The state will do it if the parent applies for Title 19, and the value is included in their assets. 

Give more details.  Is the parent alive?  It was a "two flat house."  Did the parent live in one flat and brother and another?  (In which case the flat that was not the parent's primary residence gets the parent's basis at time of gift while the other half might get retained life estate treatment.)  This is not the type of issue you need to be dealing with during busy tax season.  If your client is just wondering what the gain might be, tell him to talk to you in May.

[Abby Normal]

I thought you had to calculate the retained value even if the parent continues to live in the house.

[Catherine]

13 hours ago, ILLMAS said:

autocorrect

Sometimes I think the proper term is autoINcorrect!

[Lion EA]

Wait, your client and her brother lived in the house?  Then section 121 for $250,000 of profit, right?  Sales price - basis at transfer/FMV if lower + improvements = profit.  Unless brother paid rent, one flat was depreciated, other details I'm missing.

[Richcpaman]

"What do you mean! We owe tax! The attorney said we could do this! and avoid probate if he died!"

Sheesh.

Rich

 

[ILLMAS]

6 hours ago, Lion EA said:

Wait, your client and her brother lived in the house?  Then section 121 for $250,000 of profit, right?  Sales price - basis at transfer/FMV if lower + improvements = profit.  Unless brother paid rent, one flat was depreciated, other details I'm missing.

TP and brother were to maintain the property (repairs, improvements, insurance, property taxes) and split the bills, no rent was being charged/collect. <- TP paid 100% and the brother lived there for free. No depreciation, property has always been treated as a single family home.

Many years ago TP took out a rehab loan and fixed both apartments, TP and brother had agreed to split the mortage. <- TP paid 100% and the brother still lives there for free. No depreciation, property has always been treated as a single family home.

I will assume one of these scenarios could occur besides any tax consequences if the property is sold, the brother will either buy the house for himself, be homeless or pay someone rent.

[ILLMAS]

Edit to the above:  TP attempted to collect rent from the brother.

[Lion EA]

Your client lives there?  Personal use, primary residence.  Is the profit under $250,000?  What else do you need to do?

[SaraEA]

Did the parent who gifted the property live there?  Did he die?  Critical questions to determine if transferred basis was his original cost or FMV at date of death.

Abby, you have to calculate retained value for a gift tax return, which was apparently never done.  Also if parent applies for Title 19.  And maybe in this case, but we don't have enough details to decide.