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So my mother has asked me to sell her former residence (she and her late husband purchased it back in 1967 and have owned it ever since) which she hasn't been able to live in for the last 10 years because she injured herself when she was 87 (she's 97 now) and it's clear she'll never be able to move back.
So the property has never been rented--it just sat there empty and I have put a lot of money into fixing it up. So she can't take the $250K exclusion tax break. Motley Fool says:
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Your long-term capital gains tax rate depends on your marginal tax rate, or tax bracket
I don't understand the jargon. For the last few years she's been getting $1150/month from SS and $1500/month from rents on another SFD she owns.
So please help before I have to pay $500 just to consult a CPA. She's never had any thoughts of turning it into an investment property (since intentions play a big part with the IRS) So what is her long-term capital gains tax rate? It could be 0 or 15% or 20%
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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In my opinion (not a tax attorney) from studying this as a fairly soon to be retiree with a lot of home equity, her low income places her in the lowest "ordinary tax rate" which means 15% on the long-term capital gains tax. When "fixing it up" anything done that was improvements to help sell (not normal repairs and maintenance) is deductible from the capital gain amount when sold. If audited, there would have to be receipts showing that the seller paid for them.
You are unclear about her status. You mentioned the home was not rented so it may still qualify as her principle residence. Was the place(s) she has been residing considered temporary i.e. assisted living, nursing home, etc.? If so the home may still be considered her principle residence, you do not have to be physically in the home.
However, was some one else living in the home as their primary residence? That may confuse the issue.
I would definitely speak with qualified tax professional before proceeding. It should not cost you$500 to consult, and even if it did it would be worth rather than paying $5000 in tax.
From IRS Letter - IR-2002-142, Dec. 23, 2002
A sale will be considered because of health if the primary reason is related to a disease, illness, or injury of a qualified person. If a physician recommends a change in residence for health reasons, that will suffice. In addition to the persons listed above, a qualified person for health reasons includes certain close relatives, so that sales related to caring for sick family members will qualify.
In my opinion (not a tax attorney) from studying this as a fairly soon to be retiree with a lot of home equity, her low income places her in the lowest "ordinary tax rate" which means 15% on the long-term capital gains tax. When "fixing it up" anything done that was improvements to help sell (not normal repairs and maintenance) is deductible from the capital gain amount when sold. If audited, there would have to be receipts showing that the seller paid for them.
Thanks for the tips. Any repairs I did were to fix it up for her return and for general maintenance like a new roof, new interior paint, new carpet and sundry cosmetic things like new faucets, new wall heater in the bathroom, etc. I have all the receipts but much of the work was done over the 10 years since she injured herself and had to go into assisted living.
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Originally Posted by AZJoeD
You are unclear about her status. You mentioned the home was not rented so it may still qualify as her principle residence. Was the place(s) she has been residing considered temporary i.e. assisted living, nursing home, etc.? If so the home may still be considered her principle residence, you do not have to be physically in the home.
However, was some one else living in the home as their primary residence? That may confuse the issue.
I would definitely speak with qualified tax professional before proceeding. It should not cost you$500 to consult, and even if it did it would be worth rather than paying $5000 in tax.
From IRS Letter - IR-2002-142, Dec. 23, 2002
A sale will be considered because of health if the primary reason is related to a disease, illness, or injury of a qualified person. If a physician recommends a change in residence for health reasons, that will suffice. In addition to the persons listed above, a qualified person for health reasons includes certain close relatives, so that sales related to caring for sick family members will qualify.
It may or may not apply to your circumstance.
Thanks for your detailed response. I'm not sure what exactly her status is. Nobody ever lived in the house in all that time. It just sat empty in anticipation of her return, which will never happen now. I don't think the IRS would allow the $250K exclusion as she hasn't lived in the house for the last 10 years. So the dilemma is it's technically not her residence anymore unless intention to return counts as preserving the residency. And it was never intended to be a rental property so it has no exact classification as either residence or commercial use.
Re that last paragraph no other individuals are involved in taking direct care of her and I don't thinka Dr. would sign a note for her 10 years later.
There is one wrinkle: she and her late husband, my stepfather passed title to me and took back a life estate. She's willing to break the life estate in order for me to sell. I assume that once she signs the document breaking the life estate it loses its step-up in basis and becomes fully taxable anyway.
I would be surprised - I've never heard of it happening before - if she lost the $250K capital gain exclusion because she's been in a care facility.
But even $500 to a CPA now would be worth a lot more than $500 when you sell.
Nursing Home Exception: While normally you are required to own and live in the house for two of the last five years, people who end up living in a nursing home can have this requirement lessened to only one out of five years. In addition, time spent in the nursing home counts towards the use test as if it were the original home.
Nursing Home Exception: While normally you are required to own and live in the house for two of the last five years, people who end up living in a nursing home can have this requirement lessened to only one out of five years. In addition, time spent in the nursing home counts towards the use test as if it were the original home.
A LOT of gain. They bought the home for 25K in 1967. At last zillow valuation it was in the neighborhood of 750K. No mortgage or liens. It's all free and clear.
"Nursing home" term is kind of tricky because there is "skilled nursing facility" which is about 8K/month right now and then there is the next level down which is "assisted living facility" which runs about 3-4K/month. She was in nursing for 3 years initially and then moved to assisted about 2011 when she got better and has been there ever since.
Thanks for the tips. Any repairs I did were to fix it up for her return and for general maintenance like a new roof, new interior paint, new carpet and sundry cosmetic things like new faucets, new wall heater in the bathroom, etc. I have all the receipts but much of the work was done over the 10 years since she injured herself and had to go into assisted living.
Thanks for your detailed response. I'm not sure what exactly her status is. Nobody ever lived in the house in all that time. It just sat empty in anticipation of her return, which will never happen now. I don't think the IRS would allow the $250K exclusion as she hasn't lived in the house for the last 10 years. So the dilemma is it's technically not her residence anymore unless intention to return counts as preserving the residency. And it was never intended to be a rental property so it has no exact classification as either residence or commercial use.
Actually, I believe the amount of time has nothing to do with it, people that go into assisted living sometimes live there far longer than what is anticipated when they enter. So intention to return does count. I would not write off the exclusion. In fact, I would claim it and make the IRS challenge it, they may not. Never pay more tax than you need to pay. If the IRS wants more, they will send you a letter (CP2000). They won't call you.
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Originally Posted by thrillobyte
Re that last paragraph no other individuals are involved in taking direct care of her and I don't thinka Dr. would sign a note for her 10 years later.
There is one wrinkle: she and her late husband, my stepfather passed title to me and took back a life estate. She's willing to break the life estate in order for me to sell. I assume that once she signs the document breaking the life estate it loses its step-up in basis and becomes fully taxable anyway.
This is indeed a new wrinkle, a big one. You need to speak with an attorney. I believe that she can cancel the life estate and you can relinquish your claim which would revert it back to her. Then she can sell (you can act as her power of attorney for the sale) and avoid the whole issue. But you will need to make sure it is all done legally. Get an attorney (maybe the one that did the life estate?) to handle it. If you find that this is the way to go, ignore what I said above. (not the part about paying more than you need to. never pay more than you need to.)
There is one wrinkle: she and her late husband, my stepfather passed title to me and took back a life estate. She's willing to break the life estate in order for me to sell. I assume that once she signs the document breaking the life estate it loses its step-up in basis and becomes fully taxable anyway.
As a result of the prior transfer, your mother has no ownership interest in the house and any taxes due to from sale are yours alone. You became the sole owner when the deed was drafted giving her a life estate and your mother only retained a right to live there. Depending how the deed was drafted, she may have already have given up that right by not living in the house. But getting a signed and properly witnessed release will clear potential title issues. Have a lawyer draft one.
Your tax basis is what your mother's tax basis was when she gifted the property to you. That would be her purchase price plus any capital improvements made prior to her ownership. You current basis may be different depending on the capital improvements made since then. You may be able to add the value of her life estate when given t your basis, because you did not receive complete ownership.
If you haven't lived in the house for 24 of the last 60 months, you likely will not be able to exclude $250K ($500K if married) of any gains from your taxable income. If the house hasn't been used for investment purposes during your ownership (such as rentals), then any gains may be taxed as ordinary income and not capital gains. Best to discuss this with an accountant.
If you transfer title back to your mother, any gains would then be attributable to her and your tax basis would become her tax basis, and the tax treatment would be the same - ordinary income. If there is a chance that it might be necessary for your mother to go on Medicaid to pay for her care, the house is currently outside the 5 year lookback period for asset transfers. That means that your state cannot go after the value of the home to fund any monies spent by the for her care, which can also tie up future transfers of the property. If you transfer title back to her now, then the value of the home becomes available to the state.
*Note some of this page deals with Massachusetts but #6 should apply no matter where you live.
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