Figuring capital gains on sale of home deeded to children


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Dear Tax Talk,
My parents signed the deed of their home over to my siblings and me more than 10 years ago. My mother died 6 years ago, but my father is still living and has remarried. He is living with his current wife. One of my sisters has opted to purchase my parents’ home and pay the rest of us for the portion that we own. There are 7 of us, so the proceeds of the sale will be split 7 ways.

The sale price of the house was $70,000, so we are each receiving $10,000. My question is: How can I expect to be taxed on this $10,000? How do you calculate capital gains on the sale of a home deeded to children?
— Charlene

Dear Charlene,
You will report the sale of the property on Form 8949, Sales and Other Dispositions of Capital Assets, where you will see that you deduct your “cost or other basis” from the sales proceeds of $10,000 to determine if you have a gain or loss on the sale.

When your parents deeded the property to you and your siblings, this was considered a gift and their “basis” in the property transferred over to all of you.

Generally, “basis” is the property’s original cost plus any capital improvements made to the property over the years. However, if property is inherited, then the basis generally is the “date of death value” of the property when it is inherited.

The first thing you need to do now is determine how your parents acquired the property and what, if any, capital improvements were made once they acquired it. According to the IRS, capital improvements “improve” a property, resulting in betterment, restoration or adapting the property to new or different use.

Examples of capital improvements vs. repairs

Capital improvement
  • Puts property in better operating condition.
  • Restores property to like-new condition.
  • Addition of new or replacement components.
  • Keeps property operating efficiently.
  • Restores property to previous condition.
  • Protects property via routine maintenance.

Source: IRS

For example, let’s say your parents purchased the home for $40,000 and then made capital improvements of $9,000 over the years. Their total “basis” was $49,000 at the time it was deeded to you and your siblings. Your one-seventh share of the basis is $7,000. You have now sold it to your sister for $10,000; thus, you have a long-term capital gain of $3,000. The gain is long-term because you have owned the property for more than 1 year.

This is a very simplistic example. Also, keep in mind that if you and your siblings made any capital improvements once you owned the property, that would also be included in the basis.

Thanks for the great question and all the best to you.

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