Cost Basis of Jointly Owned Home

[PatrickA5]

FIL bought a house a few years ago for $160K. He paid the full amount. At closing, in order to avoid probate, he put DW and her sister on the deed as joint owners with right of survivorship. So, from day one there were three joint owners. He passed away last month leaving DW and SIL as 50/50 Joint Owners. We live in a common law state.

So, I guess the question is: What is the cost basis of the house that both sister now have in the property? Is it $80K each? Or something else. I assumed there was no step-up basis, but have read conflicting opinions.

 

[Winemaker]

Sorry for your loss. The portion that FIL owned at closing, 33%, gets stepped up to remaining owners. Their 50% is now blended with their original 33% basis, and ~16% gets stepped up. Just went through similar situation.

 

[cathy63]

FIL bought a house a few years ago for $160K. He paid the full amount. At closing, in order to avoid probate, he put DW and her sister on the deed as joint owners with right of survivorship. So, from day one there were three joint owners. He passed away last month leaving DW and SIL as 50/50 Joint Owners. We live in a common law state.

So, I guess the question is: What is the cost basis of the house that both sister now have in the property? Is it $80K each? Or something else. I assumed there was no step-up basis, but have read conflicting opinions.

I think you may mean "community property state" rather than "common law state"? If so, that would not be relevant in this situation, only married couples can have community property.

How does the deed describe the percentage interest in the property? Did everyone own 33.3% when the original deed was recorded or is there some other percentage specified? If they were joint tenants with right of survivorship, I think they must all have had an equal interest in the house, but you should really get the original paperwork and verify that.

FIL should have filed a gift tax return in the year that he gave 2/3 of his house to his daughters. Each of them received a gift of $160K/3 and that is the basis of the original third of the property that each owns. Any improvements that were made in the intervening years prior to his death are added 1/3 to each owner's basis.

When FIL died, his third of the house received a step up to the fair market value on the date of his death (unless his executor opts to use the alternate date) and each daughter now has 1/3 of their basis at that amount and 2/3 at the original amount.

 

[PatrickA5]

I think you may mean "community property state" rather than "common law state"? If so, that would not be relevant in this situation, only married couples can have community property.

How does the deed describe the percentage interest in the property? Did everyone own 33.3% when the original deed was recorded or is there some other percentage specified? If they were joint tenants with right of survivorship, I think they must all have had an equal interest in the house, but you should really get the original paperwork and verify that.

FIL should have filed a gift tax return in the year that he gave 2/3 of his house to his daughters. Each of them received a gift of $160K/3 and that is the basis of the original third of the property that each owns. Any improvements that were made in the intervening years prior to his death are added 1/3 to each owner's basis.

When FIL died, his third of the house received a step up to the fair market value on the date of his death (unless his executor opts to use the alternate date) and each daughter now has 1/3 of their basis at that amount and 2/3 at the original amount.

Thanks. We're not in a community property state.

There's nothing on the deed that states percentages - just that they are joint owners with right of survivorship. I assume they are considered 1/3rd owners at the time he bought the property and recorded the deed. He didn't file any kind of gift tax return.

 

[Jeffman52]

We have a similar situation we are trying to figure out.


My DW's parent deeded the house to his three kids equally many years ago. Fast forward and he was moved to assisted living last year and they sold the house. On the 1099S there is a Gross proceeds and a allocation of gross proceeds (which is what the split was).


But when doing the taxes how do you define what the net proceeds are that are taxable... since the house was deeded years ago is the value of the house zero or the amount at the time the deed was transferred, with the difference between the worth at time of deed to sale the taxable amount (divided by 3)



I hate these screwball tax issues to figure out.

 

[PatrickA5]

Sorry for your loss. The portion that FIL owned at closing, 33%, gets stepped up to remaining owners. Their 50% is now blended with their original 33% basis, and ~16% gets stepped up. Just went through similar situation.

Thanks. I've done a quick calculation and the resulting numbers seem to make some sense. Now I need to see if I can come up with anything to increase the basis (improvements, closing costs when purchased). I have no idea where that information is located.

 

[Mr._Graybeard]

A little OT -- are there states where probate is that big of a deal that avoiding it is worth going through such maneuvers? I know it isn't in Wisconsin -- the probate administration fee is 0.2% of assets. When I handled my dad's estate the fee was a few hundred dollars.

 

[cathy63]

We have a similar situation we are trying to figure out.


My DW's parent deeded the house to his three kids equally many years ago. Fast forward and he was moved to assisted living last year and they sold the house. On the 1099S there is a Gross proceeds and a allocation of gross proceeds (which is what the split was).


But when doing the taxes how do you define what the net proceeds are that are taxable... since the house was deeded years ago is the value of the house zero or the amount at the time the deed was transferred, with the difference between the worth at time of deed to sale the taxable amount (divided by 3)



I hate these screwball tax issues to figure out.

The basis of the house is whatever your DW's parent paid for it plus the cost of any permanent improvements that have been made over the years divided by three. If the basis cannot be determined now, then the IRS will treat it as $0, making the entire amount a taxable long term capital gain (assuming the house has never been a rental property).

The date of transfer makes no difference at all. When you receive a non-cash gift, the donor's basis comes with it. There is no step up. This is one of the reasons why deeding your house to your children is not recommended.

Depending on how long ago the original purchase took place, Zillow might have pricing data, or you may be able to get some historical info from the county property tax assessor.

 

[Sunset]

A little OT -- are there states where probate is that big of a deal that avoiding it is worth going through such maneuvers? I know it isn't in Wisconsin -- the probate administration fee is 0.2% of assets. When I handled my dad's estate the fee was a few hundred dollars.

Yes, IL.

Partially because it will take over a year. What is the cost of maintaining a house while you wait out probate, taxes, heating, elect, insurance, possibly repairs, lawn cutting, snow removal.

Here a basic house could easily run $8K->$9K in expenses while waiting.
Plus the actual probate cost, and maybe lawyer costs ?

 

[cathy63]

A little OT -- are there states where probate is that big of a deal that avoiding it is worth going through such maneuvers? I know it isn't in Wisconsin -- the probate administration fee is 0.2% of assets. When I handled my dad's estate the fee was a few hundred dollars.

Yes, states that use a sliding percentage of value tend to have high probate costs. For example, probating a $1M estate in MO will cost $26,550.

 

[audreyh1]

A little OT -- are there states where probate is that big of a deal that avoiding it is worth going through such maneuvers? I know it isn't in Wisconsin -- the probate administration fee is 0.2% of assets. When I handled my dad's estate the fee was a few hundred dollars.

Probate in tiny town GA was a piece of cake.

The real estate was substantial, but well under Federal estate tax thresholds. GA has no estate tax.

 

[Mr._Graybeard]

Yes, states that use a sliding percentage of value tend to have high probate costs. For example, probating a $1M estate in MO will cost $26,550.

WOW

 

[Jeffman52]

The basis of the house is whatever your DW's parent paid for it plus the cost of any permanent improvements that have been made over the years divided by three. If the basis cannot be determined now, then the IRS will treat it as $0, making the entire amount a taxable long term capital gain (assuming the house has never been a rental property).

The date of transfer makes no difference at all. When you receive a non-cash gift, the donor's basis comes with it. There is no step up. This is one of the reasons why deeding your house to your children is not recommended.

Depending on how long ago the original purchase took place, Zillow might have pricing data, or you may be able to get some historical info from the county property tax assessor.

Thanks for the info and I kinda thought it was going to be like that. I will still probably call a tax accountant and just go over it with them to ensure I fill out everything properly so I don't get audited or something stupid.

 

[Winemaker]

Yes, states that use a sliding percentage of value tend to have high probate costs. For example, probating a $1M estate in MO will cost $26,550.

In PA, the inheritance tax for non spouses is 4.5%, and depending on the county, the attorney's fees can be the same. In my county, it's 3%.

But in some fairness, PA does not tax pension, IRA, 401k, 403b, or SS income. Pretty sweet for DM for 26 years!

 

[misanman]

I went through something similar with MIL's estate some years ago. Someone told her that she should put one of the kids as joint owner on a house property so as to avoid having it probated. Her youngest son's name was on the property but she never told him. Otherwise everything went with a third to each of the three kids. DW was personal representative so I did all the financial and tax work. A bit of a pain as far as I was concerned. I don't view probate in our state as onerous and wonder why some folks go to such lengths to avoid it. The youngest son was fine with the equal shares so we just had to make it come out that way.

 

[Jeffman52]

Thanks for the info and I kinda thought it was going to be like that. I will still probably call a tax accountant and just go over it with them to ensure I fill out everything properly so I don't get audited or something stupid.

Well that was painful and cathy63 was spot on. Thank you!


DW and I (still both w**king) and had a VERY good year last year as far as taxable income. The Capital gains could not have come at a worse time.


Our tax is 15% of the difference between the basis and what we received for the sale... which is the increased value of the house. But because of the way it was gifted and the fact that FIL lived there since it was built, we inherited his basis... Also because we had such a good year on taxable income, we had to pay a 3.8% medicare surcharge on the gain. We also had to pay 4.8% for Ohio Capital gains tax.


The govt is always coming for their share.

 

[OldShooter]

... When you receive a non-cash gift, the donor's basis comes with it. There is no step up. This is one of the reasons why deeding your house to your children is not recommended. ...

Yes. DW is a retired SVP from a megabank investments & trust division. This is one of the biggest and most frequent mistakes she saw and there is no un-doing it.

 

[mrfeh]

Well that was painful and cathy63 was spot on. Thank you!


DW and I (still both w**king) and had a VERY good year last year as far as taxable income. The Capital gains could not have come at a worse time.


Our tax is 15% of the difference between the basis and what we received for the sale... which is the increased value of the house. But because of the way it was gifted and the fact that FIL lived there since it was built, we inherited his basis... Also because we had such a good year on taxable income, we had to pay a 3.8% medicare surcharge on the gain. We also had to pay 4.8% for Ohio Capital gains tax.


The govt is always coming for their share.

Always amazed at how an inheritance can end up being something to complain about...