Q:

Subject: Capital Gains Tax for Elderly

I don’t know if you answer random questions but I thought I’d try.  My mom is 71, in declining health and needs to sell her house.  She’s been there about 35 years.  The house is in CA which means a huge sale price, and an anticipated profit of approximately $350K.  If I understand correctly she’ll be taxed on the amount of $$ she makes over $250K? Is that correct?

Thanks in advance.

 
A:

This is the exact kind of issue that you and your mom need to be working on with an experienced professional tax advisor.

Having handled hundreds of cases similar to your mother's, my guess is that the profit won't be as high as you think it is because you are most likely not properly calculating her cost basis in the house.  You are probably comparing the current value to what she originally paid for it 35 years ago. 

I am just guessing here, but if she has been there 35 years, odds are that she is a widow.  When her husband passed away, her new cost basis for the entire house was stepped up to its fair market value at the time of the death.  This means that it no longer matters one iota what she originally paid for the house.  If no estate tax return or other probate documents were prepared when her husband passed away, it is still possible to work with a Realtor who knows the neighborhood to reconstruct what it was worth back then.

That gives the starting point for her cost basis.  She can then add in the cost of any capital improvements made after her husband's death, plus the cost of any furnishings and fixtures that she will be leaving with the house. 

Starting with the sales price, deducting selling expenses and the proper cost basis, I am willing to bet that the net profit won't be as high as you think.  If the net profit does turn out to be more than $250,000, you are correct that the excess will be taxed at the special low Long term Capital Gains rates, which can be as low as five percent for IRS purposes.  There will also be California tax to pay.

Again, this isn't very difficult to work out, and any experienced tax professional should be able to crunch the numbers for you to see if your mom has anything to worry about.

If you haven't already checked out my website, I have some more detailed explanation on residence sales here and  some tips on finding a good tax advisor here.

Good luck.  I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/05/2006 11:57:00 AM Send this post: