gains tax on sale of a 'gifted' house
Hi there. My grandmother's two-family home has been
in my mom's name and her brother's name for four years. There's
another brother whose name is not on the deed, due to his unstable
financial situation, but he will have an equal share when the house
is sold someday. My grandmother recently passed away and the house
will be sold in a couple of years.
They want to minimize capital gains tax, but they each have their
own primary residences. Would it limit the tax if the deed is transferred
into the name of my uncle and his wife and they lived there for
two years before selling it, thereafter distributing the monies
equally? Or, would it make sense to have the deed transferred (or
gifted or sold for a nominal sum) into the name of one of the grandchildren,
who would live there for two years, and then sell the house and
distribute the funds to my mom and two uncles? -- Chris
It sounds like you need more than a two-family
Had your grandmother not transferred
the property to your mom's and uncle's names a few years ago, this
probably would not be an issue. Although she meant to do well by
making the gift, she took away one of the principal tax benefits
afforded when you die: a stepped-up basis to your heirs. Inherited
property gets a cost basis equal to the fair market value of the
property at the time of the decedent's death, so that if the heirs
sell it shortly thereafter, there is little or no gain to pay tax
on. However, since that didn't happen, you need to try to make the
best of the situation.
Although I can't tell you that the Internal Revenue
Service would look with favor on the scenarios you mention, I can
tell you that you wouldn't be the first to try something like this.
If you transfer the property to the uncle and he later gives two-thirds
of the proceeds to his two siblings, the IRS could say that the
two siblings actually sold the property. Also the house is for two
families, so the uncle could only exclude gain on the half he uses
as a residence. A similar issue arises in the case of the grandchildren.
Also, if the house is given to them for a nominal sum, then the
aunt and uncle would be making a gift.
Your best bet is to have your mom and uncle sell the
property and pay the 15-percent long-term capital gains rate and
be done with it. The IRS could wind up putting you in the same scenario
anyway after you make all the gyrations you're contemplating, and
then it wouldn't be worth the 15-percent savings.