Thread: Sale of House Tax Question?

My mom passed away in 2007, and, before she died, she sold her house to me for $1. I sold the house in 2007. What are the federal tax consequences and how can I mimimize the taxes owed?
Thanks,

Bo

Wow! Did you guys screw up or what?!!

By selling you the house for $1 prior to her death she made a gift of equity for the remaining value of the home. Her estate must file a Federal Gift Tax return to account for that gift. There probably won't be any Gift Tax due unless the value of the home is greater than $1,012,000 or she has used up any of her lifetime Gift Tax unified exclusion previously.

From your perspective your basis in the home is whatever her basis was OR the fair market value on the date of the gift, whichever is less, adjusted for any Gift Tax paid.

When you sell the house, your gain will be the difference between your basis and the net proceeds from the sale. If you own it for 1 year or less when you sell it, the gain is taxed as ordinary income. If you own if for over 1 year the gain is taxed at the long term capital gains rate, normally 15%.

You can qualify for the exclusion of tax on the gain of a personal residence if you move into the home for at least 2 years. To qualify for the exclusion you must own the home and occupy it as your principal residence for 2 of the 5 years immediately prior to the sale. You must NOT have claimed the exclusion within 2 years of the date of the sale of the property. If you qualify for the exclusion you may exclude up to $250,000 in gain from tax if your filing status is Single, Head of Household, or Qualifying Widow(er) or up to $500,000 if your filing status us Married Filing Jointly.

For future reference, what she SHOULD have done is leave the house to you in her will. That way you would have received the stepped-up basis of the FMV of the home on the date of her death. If you sold the home for that or less, no tax would be due. Additionally if there was any taxable gain it would be treated as long term capital gain and taxed at the lower LTCG rate, generally 15%, regardless of how long you owned the home. Unfortunately it's too late to do that now as she already made a gift of the equity to you, so you'll have to handle it as outlined above.

If there ever is a next time, consult with an expert first BEFORE transferring property! You did it the WORST possible way from a tax and inconvenience standpoint!

This could mean a huge amount of money to you. You should have gotten advice from a CPA before you ever took the house from your Mom. Go see a CPA immediately and get good advice for you and your state and situation. Call the CPA even on Saturday. Call them now!

It's a little late now to ask now how to minimize tax consequences - that would have been a real good question to ask before you bought it from her for $1. If you had just inherited it, your basis would have been the value at the time she died, so you'd have shown little or no gain so would have had little or no tax. Now either your basis is $1 in which case it's all taxable, or it might be able to be considered a gift in which case you would at least take whatever her basis was, which would make the tax situation a little better.

If you owned the house for 2 of the five years prior to the sale, and lived in it as your main home for 2 of those same 5 years, you could avoid paying tax on $250K of gain - but that probably isn't the case here.

You probably need to talk to a lawyer on whether the house can be considered a gift to you - it very possibly can. A CPA might be able to advise you also. Do NOT take this question to someplace like Liberty, Jackson Hewitt or H&R Block.

This isn't the type of question to take advice for on Yahoo Answers either.