Tax question

[russ1943]

If there is a different group, forum more appropriate for this please advise.

Real estate, a condo is bought in 2000 by a not very healthy spinster. We’ll call her Gertie. Gerties mother has been giving Gertie financial help for years and Gertie decides to file a quit claim deed in 2001 to her mother in case she dies her mother will own the condo without dealing with probate. Years later her mother now well into her eighties and Gertie decides that Gerties sister is more likely to outlive her and removes her mother from the deed and adds her sister in 2008. Then about nine years later in 2017 Gertie dies. Gerties sister under her right of survivorship sells the condo for $120,000.
It has been explained that the tax burden now on the sister is the difference between the” basis” and the amount it was sold for.
Tax question for Gerties surviving sister; How does she determine the basis?
Our tax guy is sure sisters taxable gain is from original 2000 purchase price about $70,000.(basis) That would incur a tax on $50,000.
Sisters opinion is she was only added to the deed in 2008 at which time the value of the condo was estimated to be $100,000. (basis) Resulting in a tax liability on $20,000.
Opinions?

[elleng]

1. Probably the right group.

I'd listen to the 'tax guy.' Others here may have ACTUAL experience dealing with such matters.

[Angry Dragon]

2. I believe her basis is the amount the condo was worth at the time of Gertie's death

The sister would have to pay any inheritance taxes due at the time of her sister's death

[russ1943]

3. We'd like that.

Angry, If her basis were to be the amount the condo was worth at the time of Gerties death then there would be no gain as the condo was sold almost immediately, after it was cleaned out and listed for sale. The tax guy is sure there is no inheritance component as the 2008 quit claim deed made her an owner on that document. Sister, my wife, and I would like the no gain basis but it doesn’t seem likely. Thanks for the opinion though.

[A HERETIC I AM]

4. Straight from the horses (The IRS) mouth;

Question
Is money received from the sale of inherited property considered taxable income?
Answer
To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

The fair market value (FMV) of the property on the date of the decedent's death.
The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation. See the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
For information on the FMV of inherited property on the date of the decedent’s death, contact the executor of the decedent’s estate. Also, note that in 2015, Congress passed a new law that, under certain circumstances, requires an executor to provide a statement identifying the FMV of certain inherited property to the individual receiving that property. Check IRS.gov for updates on final rules being promulgated to implement the new law.

If you or your spouse gave the property to the decedent within one year before the decedent's death, see Publication 551, Basis of Assets.

Report the sale on Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets:

If you sell the property for more than your basis, you have a taxable gain.
For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.
Under the new law passed by Congress in 2015, an accuracy-related penalty may apply if an individual reporting the sale of certain inherited property uses a basis in excess of that property’s final value for federal estate tax purposes. Again, check IRS.gov for updates on final rules being promulgated to implement the new law.

More here with links to the relevant publications:

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances

[progree]

5. Dunno, but it's not a simple inheritance. A quit claim deed is a transfer of ownership while

the donor is still alive (on edit: at the time the deed is filed and recorded), seems to me. Seems like a gift tax was due at that time.

I googled: quit claim deed and capital gains tax

and read just a couple of articles

http://time.com/money/4659139/quitclaim-deed-taxes/

http://www.calcpa.org/public-resources/ask-a-cpa/home-property/tax-issues/does-my-mother-owe-capital-gains-on-property-received-in-a-quitclaim-deed

and some of Wikipedia's article on quit claim deeds - https://en.wikipedia.org/wiki/Quitclaim_deed

But then I don't know beans about quit claim deeds, apparently there are various forms of it???

I don't know what the stuff about adding and removing and adding someone to a quit claim deed is all about, but I don't think it's the same as changing one's will.

If it was a simple inheritance like if Gertie put her sister in the will, then yup, the basis would be the fair market value at the time of Gertie's death, no question about it. (But then I'm not any kind of expert in any of this).

[progree]

6. Here's another: quit claim deed vs. transfer on death deed

http://www.thinkglink.com/2013/03/23/transfer-death-deed-vs-quit-claim-deed-difference/

In a quitclaim deed, your mother conveys to you and your sister her interest in the property. After the quitclaim deed is filed, your mother would no longer own any part of the home. That’s because she conveyed title to you. That quitclaim deed would essentially transfer all of your mother’s interest and ownership in the home to you and your sister.

... the quitclaim deed that transfers ownership would transfer that ownership at the time the deed is given to the new owner and recorded. For federal income tax purposes, the transfer date would trigger any tax issues.

It all makes sense until the first two of the last three paragraphs. I thought it was clear that the quit claim deed transfers ownership right now (there's no "on someone's death" ). But then the 3rd to last paragraph goes gobbledy gook on me:

In a quitclaim deed situation, the new owner takes title with the cost basis that the owner had on that property. If the owner’s basis was $50,000 and the property is worth $150,000 at the time of that person’s death, the new owner would have a basis of $50,000. And if that person sold that property for around $150,000, that person would have a profit on the sale of about $100,000 even though the new owner might have only owned the property for a very short period of time and the property never appreciated during that time of ownership.

What's this "at the time of that person's death" doing in there? Sigh. Nothing in what they explained about the quitclaim deed up to that last paragraph has said anything about someone's dying being relevant to anything. I suspect that since this article discusses both quitclaim deeds and transfer-on-death deeds, the author might have momentarily lapsed into confusing the two, but then, how trustworthy is any of the rest of the article?

As for the "transfer on death deed", it sounds like just what it says -- it's like naming someone on a will but with the enhanced benefit of trying to avoid probate:

The owner could name the heir of the property in a will, but the intended beneficiary would have to wait for the court in probate to issue a deed to transfer title from the deceased owner to the intended beneficiary.

In an attempt to avoid probate court, the transfer on death instrument would take effect on the death of the owner of the home

[PoindexterOglethorpe]

7. I'm pretty sure that

the cost basis in this case is the original price of the condo.

If it had gone to the sister in a will, then the cost basis would be its value the day Gertie died.

And yes, putting a person's name on the will ought to trigger a taxable gift, but usually that gets overlooked, even by the IRS.

While it's nice to avoid probate, there can be disadvantages to this kind of property transfer.

And the best thing is going to be to contact someone who does taxes for a living.

[progree]

8. I don't think putting someone on a will ever has any tax effect at the time

nor would filing a transfer on death deed. That's because ownership is not currently changed when these action(s) are taken -- the current owner remains the owner throughout his/her life (or until the owner sells it or whatever).

On the owners' death, then there are the tax implications, but its just an inheritance, so there's a step up in basis to the fair market value at the time of the owner's death.

A quit claim deed is different -- it is a transfer from someone to someone else as soon as it is filed.

[PoindexterOglethorpe]

9. If the houses passes in a will,

the cost basis becomes the value the day the original owner died. If passed by quit claim deed and simply putting another person on the deed, it's the same as if both names were on the deed from the date of purchase. The tax guy is right.

However, the increase in value on this property isn't too huge, and the current owner will pocket a tidy sum of money.

[progree]

10. My sister inherited a house, and the basis was the FMV at day of death

We both inherited some stock -- same thing -- the basis was FMV at day of death. I also had a farm quit-claimed to me, and it was a transfer of ownership from my parents to me, as expressed in the trust agreement and the will (my sister was the executor of the estate, and she and her lawyer wrote and filed the quit claim deed). The basis was the FMV on the date of death.

It would have been frankly impossible, and the IRS recognizes this, for inheritors to go through the original owners' papers to try to establish what they paid for it 40 or 60 years ago or whatever -- not just the house, not just the farm, but every lousy share of stock.

[PoindexterOglethorpe]

11. Right. You inherited in a will.

Not through a before-the-death quit claim. The trust agreement is in lieu of a will. Not the same as a quit-claim deed with no will. Or entirely outside of any will.

A will makes all the difference in the world, in very many ways, not the least of which is that if someone dies intestate it can be a real nightmare for the survivors.

Everyone needs a will.