Tax after selling Dad's house

[ducky911]

Hi,

Had to move Dad into assisted living and it will soon be time to sell his house. It is in a family trust and Mom died three years ago.
Guessing the house will sell net for 2 million here in California. Always have thought it wouldn't sell it until Dad passed and profits would be tax free.

Dad want to sell and split the profits four ways ( 3 sibs and me)

Mom's half is tax free.

I think Dad will have to pay taxes on his half. He lived there for 60 years built it for 35k plus some improvements over the years.

Looking for some advice as to what kind of taxes we will be facing.

Thanks

[audreyh1]

He should get some break on his realized capital gains.

I don't think it matters that he is in assisted living.

[Lakewood90712]

Sorry to hear. We were in this position 4 years ago. IIRC Basis plus improvements plus $250k is tax free. He will get hit very hard with taxes on the gain. Please confer with his estate planning atty or cpa before doing anything. Might be a strategy to avoid cap gains. Gift the prop to children ,etc. this is not a DIY with that much $ involved.

[cathy63]

California is a community property state, so your Dad got a step up on the full basis when your Mom died. He will have to pay capital gains taxes only on the increase in value since her death.

If he gives you each nearly a half-million after selling the house, then he will have to file a gift tax form but will not owe anything (assuming he hasn't previously given away several million dollars).

If he runs out of money and needs Medicaid to help care for him in assisted living in the next few years, whatever he gives you can be clawed back, so if that might be a problem, he should keep the money from the sale and let you inherit whatever is left when he dies.

[pb4uski]

Who are the beneficiaries and what are the provisions of the trust? Who is the trustee? The trustee will be required to follow the provisions of the trust, otherwise the trustee could be personally liable if another beneficiary of the trust was shorted challenges what the trustee did.

[TwoByFour]

Quote:

Originally Posted by cathy63 California is a community property state, so your Dad got a step up on the full basis when your Mom died. He will have to pay capital gains taxes only on the increase in value since her death.

^^^ This.

That is the interesting thing about community property - full step up in basis, not just 50% which is the norm in non-CP states. And apparently CP rules apply even if the property is assigned to a trust.

[TrvlBug]

Quote:

Originally Posted by TwoByFour ^^^ This. That is the interesting thing about community property - full step up in basis, not just 50% which is the norm in non-CP states. And apparently CP rules apply even if the property is assigned to a trust.

Not sure if it applies now, but 20 years ago the deed had to be specifically titled, not JWRS. I almost had to go to court to retroactively retitle when DM passed, however, dad squeaked by when we had to sell the house within the year.

[ducky911]

thanks so much, this was helpful.

[Brat]

Humm, so in a community property state like California if one spouse passes the home should be appraised. When the surviving spouse sells the house the basis is that appraised value?

Interesting...

[cathy63]

Quote:

Originally Posted by Brat Humm, so in a community property state like California if one spouse passes the home should be appraised. When the surviving spouse sells the house the basis is that appraised value? Interesting...

Yes, having an appraisal done within a few months of the first spouse's death is one way to establish the new basis. Another is to look at historical data from around the time of the inheritance when you finally sell. We got appraisals for both my Mom and MIL when our Dads passed away in 2016 because both of them are planning to sell within the next 3 to 5 years and we thought it would be easier.

I don't see why the need for a valuation would be limited to community property states though. Even in a "tenants in common" situation doesn't the surviving spouse need to know the value of the half that he/she inherited? Taking the appraised value and dividing by 2 would be the way I would figure that out. How does everyone else do it?

[TrvlBug]

Quote:

Originally Posted by cathy63 Yes, having an appraisal done within a few months of the first spouse's death is one way to establish the new basis. Another is to look at historical data from around the time of the inheritance when you finally sell. We got appraisals for both my Mom and MIL when our Dads passed away in 2016 because both of them are planning to sell within the next 3 to 5 years and we thought it would be easier. I don't see why the need for a valuation would be limited to community property states though. Even in a "tenants in common" situation doesn't the surviving spouse need to know the value of the half that he/she inherited? Taking the appraised value and dividing by 2 would be the way I would figure that out. How does everyone else do it?

I would think a CMA (comparative market analysis) done by a realtor would be sufficient. An appraisal in our neck of the woods is around $2K...no need to go that route. We used a CMA to document dad's basis when his primary res was sold.

[cathy63]

Quote:

Originally Posted by TrvlBug I would think a CMA (comparative market analysis) done by a realtor would be sufficient. An appraisal in our neck of the woods is around $2K...no need to go that route. We used a CMA to document dad's basis when his primary res was sold.

Wow, that's high! I think Mom's appraisal was only about $350. I know it was less than $500.