Q:

Subject: Question

My Mom is 86 yrs. old. she is a widow, property held in a trust. Dad passed away, 5 yrs ago. They have owned the house 43 years. If I sell it I am aware that she has an exemption of $250,000. I have been living with her since my divorce (2yrs or so) she is in a wheel chair, I take care of her, I am going to move to South Orange County. She wants me to take the money and use it to buy a house, she doesn't want to be alone. Assuming I sold the house for $500,000 if we reinvest all of the proceeds into a new SFR, I would qualify for the new loan does she have to pay taxes on the other $250,000?

 

I am in charge of the trust, as it stands when she passes 5 siblings split the proceeds, I have one year to liquidate. Since the other siblings could care less about her and she does not want to live alone, and I have been funding alot of her living and housing expenses she wants me to take the money buy a home with her putting up the proceeds of the current house and liquidate the proceeds from the new house to my siblings WHEN I AM READY. I feel funny about this. Can you talk to me. Charging me is OK.

A:

There are several very important issues here that need to be addressed and analyzed properly.  You, your mother, and any other concerned family members need to be working directly with a competent tax professional.

One of those issues that will need to be analyzed is your mother's current cost basis in her home.  When your father passed away, all of the accumulated gain that was in the house was literally wiped off the books.  In a community property state such as California, the surviving spouse has her cost basis stepped up to the property's fair market value (FMV) as of the date of death.  If you haven't already figured what that was, you should start working with a Realtor or real estate appraiser ASAP to do so. 

Her cost basis will start with that FMV figure and will be increased by any capital improvements made since then, plus the cost of any appliances and furnishings that will be left with the house when it is sold.  This is critical because when you compare your mom's cost basis total to the expected selling price, and subtract commissions and other selling costs, there is a very good chance that the net gain will be less than $250,000 and thus tax free.

If the net gain is more than $250,000, the excess will be taxable at the special long term capital gains tax rates.  Reinvesting into a new residence has not been part of our tax code since May 1997.  One way to possibly postpone the taxes would be for her to carry back some of the sales price as a note receivable.  This would enable her to use the installment method of reporting the gain over the years in which she receives the principal payments.

I do have a summary of the home sales rules on my main website.

The preceding assumes that your mother's house is in the name of her Living (aka Revocable) Trust, which entitles her to the Section 121 tax free sale.  If the home is in another kind of trust (Irrevocable), the story changes dramatically and she probably will not be entitled to exclude the gain.  A qualified tax pro can help decipher that situation.

Another big issue that will need to be addressed with the assistance of a tax pro is the matter of your mother gifting of any money to you.  There are several ways in which this can be done, with various Gift and Estate tax implications.   Again, a qualified tax pro can assist in setting up the best plan for everyone involved.

None of these issues are very complicated, so you shouldn't have any problem working them out with the aid of a good tax advisor.

I wish I could be of more help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone to whom we could refer you. If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; but I wish you the best of luck.  

Kerry Kerstetter

Follow-Up:

Thank you soooo much. I will follow your advice.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/11/2006 09:18:00 AM Send this post: