Helping nursing home relative with taxes regarding home sale

[Perryinva]

I have gotten too many confusing answers on the internet & you all are the smartest people I “know”, so I hope someone can give me an accurate answer!

Indirect relative is 96, in a nursing home. She is my step-sons grandmother. She owned her own home since 1966. She went in to the nursing home in 2023, on Medicaid, as SS is basically her only income. All her SS (-$160) goes to the home and Medicaid picks up the rest. Her house, paid off in the ‘70s, which we tried to upkeep by paying a friend to cut the lawn, & do minor repairs etc, was to be kept on the remote chance she was ever released from the home (her wishes). The step-son was to inherit the house, but it is in FL, and he has no interest except to cash out on it. She is now barely cognizant of anything, on hospice, but could still live a year or more. Who knows.

My wife & step-son, have a DPOA to control the house, inheritance, her finances etc. We had to deal with break ins & squatters etc over the last 2 years. It was not in a good neighborhood, and was uninsurable with many $$ issues. But it was large house and on 2 lots, so valuable.

The decision was made to sell it a reputable “We Buy Houses” company which went fine.

She purchased the house in 1966 for $18k. Capital improvements due to hurricanes, garage to in-law suite conversion and a room addition total about $64,000 over the years. The house was sold for $380k. Bottom line, even after the $250k exclusion, as she is single, is there are Capital Gains on the house of about $46,000.

We have an elder attorney handling converting the assets from the sale in to an income producing RE for a QIT to generate income to be paid to the nursing home and retain Medicaid eligibility. However, he was unsure about how or if the Capital Gains taxes would have to be paid. His advice was to estimate them and pay in advance directly to the IRS from the proceeds before the asset conversion and QIT is established.

So here’s the problem. With only SS as income (actual a small yearly pension of $3k also) it appears that the Gains from the house may have either a zero or 15% tax, depending on what her taxable income is. Without the Capital Gains, her income is about $33000, with $30k from SS, so tax free. She hasn’t filed a return in many years as she never owes taxes.

She was issued a 1099-S, so she will have to file (meaning I will have to handle it). I can’t find a tax calculator that includes a home sale to determine if she owes any taxes on that Capital Gains because it all depends on what her taxable income is. Dies the Capital Gains of the house now make her SS taxable? Do I pay some amount upfront as suggested or just ignore the while thing and wait fir the IRS to come knocking, by which time she would likely be dead or in a coma.

Any advice (except see a tax attorney) is welcome.

 

[SevenUp]

Figure the realized gain on the house, after subtracting the $250K. Enter that amount as a long term capital gain, along with all her other income (and her medical expenses in case itemization will be more favorable than the standard deduction) in any tax estimation tool that addresses those items, and you should get a reasonable answer.

 

[gauss]

AARP Tax-Aide should be able to do her taxes for free. They can handle most residential home sales that were never used for business/rental purposes in the past. You may need to determine the cost basis.

Did she ever own the home jointly with someone who has since died? If I am not mistaken, then she would have a step-up in basis on 1/2 the house to the day of death of the joint owner. If joint owner died recently, then this could take the Cap Gain to 0. Note the details on this would differ depending on which state she resided in (community property vs common law state).

As far as paying the taxes goes, one strategy is that if she pays at least 100% of her prior year's total federal taxes (via quarterly estimates or via withholding) , then she should not owe any "under-withholding" penalty/fees.


-gauss

 

[SevenUp]

Figure the realized gain on the house, after subtracting the $250K. Enter that amount as a long term capital gain, along with all her other income (and her medical expenses in case itemization will be more favorable than the standard deduction) in any tax estimation tool that addresses those items, and you should get a reasonable answer.

For example, using the case study spreadsheet in Excel with these inputs:

Age 96, filing single​

$64K LTCG​

$3K pension​

$30K SS​

$32,220 medical expenses ($30K nursing home plus $2220 Medicare premiums)​

the federal tax due for TY2025 is $3,153. Different inputs will likely produce a different result.

 

[cathy63]

Cap gains from the sale of a house (exceeding the exclusion) are taxed exactly the same as cap gains from the sale of stock, so you can use any calculator that can handle LTCGs to estimate her taxes. I am partial to dinkytown.net, but there are many others.

When you estimate, make sure to use the standard deduction for over 65, which will be $17k, though as Sevenup pointed out, it’s quite likely that her medical expenses are high enough to itemize and she’ll have partial year property tax that also goes towards itemized deductions.

Since she did not owe any tax in 2024, she does not have to pay any estimated tax for 2025. You can wait and pay it all next April.

 

[pb4uski]

I have gotten too many confusing answers on the internet & you all are the smartest people I “know”, so I hope someone can give me an accurate answer!

Indirect relative is 96, in a nursing home. She is my step-sons grandmother. She owned her own home since 1966. She went in to the nursing home in 2023, on Medicaid, as SS is basically her only income. All her SS (-$160) goes to the home and Medicaid picks up the rest. Her house, paid off in the ‘70s, which we tried to upkeep by paying a friend to cut the lawn, & do minor repairs etc, was to be kept on the remote chance she was ever released from the home (her wishes). The step-son was to inherit the house, but it is in FL, and he has no interest except to cash out on it. She is now barely cognizant of anything, on hospice, but could still live a year or more. Who knows.

My wife & step-son, have a DPOA to control the house, inheritance, her finances etc. We had to deal with break ins & squatters etc over the last 2 years. It was not in a good neighborhood, and was uninsurable with many $$ issues. But it was large house and on 2 lots, so valuable.

The decision was made to sell it a reputable “We Buy Houses” company which went fine.

She purchased the house in 1966 for $18k. Capital improvements due to hurricanes, garage to in-law suite conversion and a room addition total about $64,000 over the years. The house was sold for $380k. Bottom line, even after the $250k exclusion, as she is single, is there are Capital Gains on the house of about $46,000.

We have an elder attorney handling converting the assets from the sale in to an income producing RE for a QIT to generate income to be paid to the nursing home and retain Medicaid eligibility. However, he was unsure about how or if the Capital Gains taxes would have to be paid. His advice was to estimate them and pay in advance directly to the IRS from the proceeds before the asset conversion and QIT is established.

So here’s the problem. With only SS as income (actual a small yearly pension of $3k also) it appears that the Gains from the house may have either a zero or 15% tax, depending on what her taxable income is. Without the Capital Gains, her income is about $33000, with $30k from SS, so tax free. She hasn’t filed a return in many years as she never owes taxes.

She was issued a 1099-S, so she will have to file (meaning I will have to handle it). I can’t find a tax calculator that includes a home sale to determine if she owes any taxes on that Capital Gains because it all depends on what her taxable income is. Dies the Capital Gains of the house now make her SS taxable? Do I pay some amount upfront as suggested or just ignore the while thing and wait fir the IRS to come knocking, by which time she would likely be dead or in a coma.

Any advice (except see a tax attorney) is welcome.

+1 with gauss on adjusting the basis if she owned the home jointly and the other owner died... that will likely reduce her tax liability.

I used IRS & State Tax Calculator | 2005 -- 2025 to estimate her 2025 tax liability assuming single over 65, $3k pension, $30k SS and $46k LTCG and $32,220 of itemized deductions and it indicated federal income tax of $0.

The other thing to consider is any state income taxes... those may well exceed the federal income tax. You state that the house is in FL, but is the nursing home in FL as well? If so, then no state income taxes.

 

[SevenUp]

For example, using the case study spreadsheet in Excel with these inputs:

Age 96, filing single​

$64K LTCG​

$3K pension​

$30K SS​

$32,220 medical expenses ($30K nursing home plus $2220 Medicare premiums)​

the federal tax due for TY2025 is $3,153. Different inputs will likely produce a different result.

I used IRS & State Tax Calculator | 2005 -- 2025 to estimate her 2025 tax liability assuming single over 65, $3k pension, $30k SS and $46k LTCG and $32,220 of itemized deductions and it indicated federal income tax of $0.

Between the two of us we may have it correct.

Yes, $46K LTCG instead of $64K, and the $32,220 is gross medical expenses. After subtracting 7.5% AGI (which, unfortunately, that "IRS" calculator doesn't do), that's $26,633 itemized, leading to a whopping $186 federal tax due.

 

[pb4uski]

Between the two of us we may have it correct.

I agree. And no state income tax?

 

[Perryinva]

Thank you all very much! Excellent responses. Part of the confusion is I didn’t realize that her SS & pension amounts which go entirely (-160) to the nursing home (yes, in Miami where the house was) because of Medicaid, could be used as a medical expense deduction. Additionally, while I knew that home repairs can not be used to adjust basis, it turns out that repairs to return a home to its pre-hurricane condition, for uninsured damage, can be used. She hasn’t had homeowners insurance in over 30 years so all the damage from hurricanes, including Andrew, was out of pocket, so the LTCG is now much less. Enough, that, along with the nursing home as a medical expense deduction, means she will not owe any or very very little tax.

 

[SecondCor521]

Yet another thing that may reduce the capital gains on the home sale are selling expenses. The biggest one is realtor fees, which you may not have had given the nature of the sale. Check IRS Pub 523 for the full list.

Selling expenses can be subtracted from the capital gains on the home sale, which in turn will reduce the tax bill.

On the very off chance that she was married and her partner died within the last two years, she might have the full $500K MFJ exclusion. I forget the details but they're out there if you search.

 

[Perryinva]

No, unmarried for over 40 years. As suspected, no costs to sell home with “Cash for house buyer”.

BTW, I know those type buyers never give a worthwhile price, but imagine truing to sell a house from Virginia, that is uninsurable, due to with a leaking flat roof, termites, rot, non-impact windows, with non opening bars on all of them, no AC or heat, rotted plumbing, and in the Little Cuba neighborhood of Miami where only Spanish is spoken. We had two REAs come out, both claimed to want to rep it, but acknowledged that it was an investor only sale, for cash. The estimates they threw out, were ballpark (within $10-15k) of what we got, after subtracting their fees & commission with zero hassles.

 

[RetiredHappy]

Call me confused. Wouldn't money from sale of the home go to repay Medicaid first?

 

[youbet]

Call me confused. Wouldn't money from sale of the home go to repay Medicaid first?

Likely, funds remaining in the QIT will wind up with Medicaid when she passes. That probably varies from state to state.

 

[RetiredHappy]

The first question is how could the home be sold, which obviously it has been. Medicaid would be a lien on the home and it could not be sold, unless it was sold before Medicaid could do so.

 

[Perryinva]

Medicaid rules depend on the state. In most states, yes, the sale of the house would eliminate Medicaid eligibility based on assets. In Florida, a Miller Trust or QIT protects Medicaid eligibility from excessive income, by redirecting the income in to the trust where it is not counted for eligibility. All funds within the QIT must go to Medicaid. So with the sale of a house there are 60 days to use the proceeds to purchase income property which must have the income directed in to the QIT. All her income then goes to Medicaid, but the income property is not an asset for calculation. There are businesses set up in Florida that specialize in just this type of transaction, and only deal with attorneys. You pretty much have to use an Elder Law attorney in order to manage the filings to Medicaid and the trust establishment, as well. This is big business in Florida and most other “retirement “ states that have QITs, which is only a few. After she passes, the income property is inherited by her grandson (only living heir) probate free as part of the deed.

Conversely, if with a Ladybird Deed, had she died while in the house, it would have passed to her heir unprobated as well. If we could have talked her in to it, it would have been smarter to move her in to a condo in good repair with rentable options while she was in good health, and started a QIT when she went in to the nursing home, fairly common in Florida, but she would not leave her falling apart house of 60 years. Understanding the laws was not something she could comprehend.