underpayment penalty on sale of home

[troutnut1]

We sold my 89 year old mothers house recently. She will receive a stepped up basis from 2012 when my father passed. After subtracting her basis (had retrospective appraisal done), and costs of sale she will have gain of about $90,000 resulting in about $10,000 federal and $5000 CA tax when added to her social security and pension income.

She has never had a filing requirement based upon her income. I’m wondering whether we should just send in the estimated taxes by year end, or leave the funds in T-bills until filing time, and then pay. I am a little leary about the penalties, but if they aren’t too bad we’ll just pay them later. Any chance we could get out of penalties in this one-time situation if I argue that the previous years taxes of $0 were fully paid ;-)


Thanks an advance for all your help.

[Philliefan33]

If your mother lived in the home for two of the last five years, she gets a $250K exemption on the sale of the house. Is the $90K gain after that exemption?

[audreyh1]

No federal underpayment penalty if she at least pays estimated tax of the amount equal to the prior year taxes. The remainder is due April 15.

If she owed zero last year then zero.

Also note the capital gains exemption on sale of a home.

[troutnut1]

Quote:

Originally Posted by Philliefan33 If your mother lived in the home for two of the last five years, she gets a $250K exemption on the sale of the house. Is the $90K gain after that exemption?

Yes. Thank you I forgot to mention that. It’s basically
$780,000 sale price
385,000 stepped up 2012 basis
250,000 exclusion
$55,000 costs

taxable gain $90,000

[audreyh1]

So based on her prior year taxes which I assume were $0 based on no filing, it looks like you don’t have to worry about Federal penalty for underpayment of estimated taxes.

I just don’t know the CA rules.

[Done]

For California, escrow should have filed form 593 stating that your mother is exempt from withholding on the sale of her primary residence. CA conforms to federal safe harbor rules on the payment of estimated taxes, so there will also be no state penalty.

[SecondCor521]

What are the $55K in costs? Rereading the OP I'm guessing those are selling costs.

She can reduce her taxable gain by:

(a) increasing the basis by certain costs in acquiring the home - the records for this may be lost by now, and
(b) increasing the basis by any permanent improvements - if they lived there a while there are probably some of these, and
(c) decreasing the proceeds by certain selling costs - most notable of these are real estate sales commissions she paid, which could be considerable on a $780K home, but I think there are others that can also be included

See IRS Pub 523 for details on these items, especially the first two which you might not have accounted for yet.

...

Also, you probably already know this, but I believe CA is a community property state, so I think she would get a full step up in basis on the house to the 2012 value, not half. I'm guessing the $385K number includes that full step up.

...

I'm not sure if you included this in your calculations, but I think the $90K gain (or whatever lesser number it might turn out to be) could possibly - will probably - make some of her SS taxable. Something perhaps to mock up in tax software just so she's mentally/emotionally/financially prepared for the tax bill next spring.

[cathy63]

Quote:

Originally Posted by SecondCor521 What are the $55K in costs? Rereading the OP I'm guessing those are selling costs. She can reduce her taxable gain by: (a) increasing the basis by certain costs in acquiring the home - the records for this may be lost by now, and (b) increasing the basis by any permanent improvements - if they lived there a while there are probably some of these, and (c) decreasing the proceeds by certain selling costs - most notable of these are real estate sales commissions she paid, which could be considerable on a $780K home, but I think there are others that can also be included See IRS Pub 523 for details on these items, especially the first two which you might not have accounted for yet. ...

Because CA is a community property state, the surviving spouse inherits 100% of the property. Since the basis is fully reset at that time, you can't include the acquisition costs (a) or improvement costs (b) that were incurred prior to the first spouse's death. They are fully accounted for in the new stepped-up basis. Improvements made after that date do increase the basis in the property.

[SecondCor521]

Quote:

Originally Posted by cathy63 Because CA is a community property state, the surviving spouse inherits 100% of the property. Since the basis is fully reset at that time, you can't include the acquisition costs (a) or improvement costs (b) that were incurred prior to the first spouse's death. They are fully accounted for in the new stepped-up basis. Improvements made after that date do increase the basis in the property.

Ah, good points, thank you. I appreciate you setting me straight!

[troutnut1]

Quote:

Originally Posted by Done For California, escrow should have filed form 593 stating that your mother is exempt from withholding on the sale of her primary residence. CA conforms to federal safe harbor rules on the payment of estimated taxes, so there will also be no state penalty.

Thank you all for this! We can rest easier now and it is greatly appreciataed.