 Dear Tax Talk:
Mother put her home in the names of her sons 10 years ago to prevent them having to pay inheritance tax. However, recently the home had to be sold in order to pay for mother's care in a nursing home. Are the sons responsible for capital gains tax, as they will reap none of the profits? Profit on the sale will go to cover mother's expenses.
-- Judith
 Dear
Judith,
Unfortunately, the idea of putting the mother's house in her sons' names may have not been the best tax-planning move.
First off, there is no federal inheritance tax. A few states do have inheritance taxes, but at the federal level, there is an estate tax. Ten years ago the estate tax didn't apply to estates valued at less than $600,000; today the exemption is up to $2 million. Transferring property by gift to a child doesn't make sense if the donor's assets will not exceed these exemptions.
The reason it doesn't make sense is that a transfer by gift results in the recipient taking a basis in the property equal to the donor's cost. A transfer by death results in a stepped-up basis to the recipient equal to the property's fair market value at the date of death.
In addition to the difference in basis problems, when you transfer your principal residence, you're losing the $250,000 (or $500,000 for a married couple) gain exclusion that you would be entitled to on the sale of your home.
Unfortunately, the sons are responsible for the capital gain on the sale of their mother's home.
On a brighter tax side, one of the sons should be able to claim mother as a dependent on his tax return. Most often, nursing home care qualifies as a medical expense. The son that can claim her as a dependent can use this deduction to help offset the gain from the sale of the home.
|
