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So we have lived in our home in California for 20 years..
Last year my mom in law died, and she added my husband ( her only child) to her deed..
So we are in the process of selling that home now.. We were going to use that money and buy a new home in Washington to retire.
We had considered letting our son rent out our present home and sell it in a year or so so we don't have the stress of selling two right now..( he wants to move back to WA later too with his wife and daughter)
So if we used the money from the inherited home and buy one in Washington we will pay capital gains.. If we let my son rent our home, we will have to pay capital gains too since we are going to already be in a new home right?
Would it make better sense to sell the mom in law house now, use some of that money to fix up our current home and sell that right after, then buy a house in WA? Since we lived in this one for more than 2 yrs we would not pay capital gains correct?
So we would only pay capital gains for one house is that right?
Frankly, it should have been CPA time BEFORE your mother in law added her son to the deed. There would have been zero capital gains on the inherited house if this had been handled properly. Paying a professional for their advice and expertise would have saved you money then, and will now.
If we let my son rent our home, we will have to pay capital gains too since we are going to already be in a new home right?
No, the basic test is that, at the time of sale, you needed to have lived in the house for 2 of the last 5 years. On a qualifying home, there is a $500,000 exclusion to capital gains if you are married and file jointly. You can find more information here: https://www.irs.gov/publications/p523/ar02.html
If you subsequently rent out your house, you may be subject to recapture of depreciation (whether or not you claim it), so be sure to discuss with your financial advisor whether that would apply if the house is used (or rented) by a family member.
If you didn't receive professional advice when your husband's mother deeded an interest to him, that may have been a costly mistake. Did she retain a life estate in the property? Regardless, get professional advice now to sort through your circumstances.
Unfortunately, many people deed property without understanding the consequences. As an example, I once purchased a farm from a group of siblings. They had been placed on the Deed many years prior and the mother continued to live there until her death...BUT she had not retained a life estate--she merely deeded the property to them without reservation. As a gift, the mother's basis in the property then became the basis in the property for the siblings. Since the farm had been in the family for many years, that basis was very low. Had they inherited the property and received title after their mother's death, the siblings would have received a stepped-up basis based upon the value at the time of death. Their mistake ended up costing each of them tens of thousands of dollars in capital gains tax.
Thank for you advice everyone..
We did talk to our CPA last year.. he just retired so we talked to new one couple weeks ago.. Both told us we would pay for capital gains on the mom in law house..
But we decided to sell our current house now too since we will need that for retirement plan..
This is all new to us.. Going to contact our Realtor and maybe find a different CPA..
Thank for you advice everyone..
We did talk to our CPA last year.. he just retired so we talked to new one couple weeks ago.. Both told us we would pay for capital gains on the mom in law house..
But we decided to sell our current house now too since we will need that for retirement plan..
This is all new to us.. Going to contact our Realtor and maybe find a different CPA..
You'll need to review the Deed your husband received to determine whether a life estate had been retained by his mother. If so, a stepped-up basis should apply. Otherwise, the basis in the house would be that of his mother--which could be a big difference as to how much would be subject to capital gains tax. It sounds like the latter is the most likely. Good luck sorting through all of this.
therese, here's where your mother-in-law went wrong. Listen to my story:
My parents have a house worth (today) roughly 750K. They transferred title to me AND TOOK BACK A LIFE ESTATE. That taking back a life estate for themselves, meaning they have the right to do anything to the house except sell it or otherwise despoil its value, prevented the gift from being a "complete" gift in the eyes of the IRS and thus being subject to capital gains tax. So I get firm title to the house upon their passing and the IRS will "step up the basis" to its current value upon their deaths. They bought the house in the 70's for 30K. When I inherit it it will be worth roughly 750K and none of that is taxable, just three quarters of a million dollars straight into my pocket because they had the foresight to carry back a life estate on the transfer to not make it a complete gift and thus a taxable event when they die.
I hope others learn from this. In the above example I would have paid roughly 250K in capital gains to California and Federal if my parents had just put me on title with them.
My husband asked many times for her to do a will.. she never wanted to talk about it.. She was a grumpy bitter lady..
I think that was selfish of her but we did not argue with her about it.. I am sure she just figured he would get the house ...
She never married and my husband is the only child..
She got sick really fast last year and died few months later..
Trust me, I wish we could have done it the right way.. But in the end, we are just grateful to have something, anything....
My husband asked many times for her to do a will.. she never wanted to talk about it.. She was a grumpy bitter lady..
I think that was selfish of her but we did not argue with her about it.. I am sure she just figured he would get the house ...
She never married and my husband is the only child..
She got sick really fast last year and died few months later..
Trust me, I wish we could have done it the right way.. But in the end, we are just grateful to have something, anything....
You still should consult with an experienced real estate attorney about this. When someone gives a Deed, there still needs to be an acceptance of that Deed. Maybe there's a way to deal with your situation...or maybe it's too late. I don't know...just seek legal counsel.
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