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Dear Tax Talk,
My father-in-law left land to my mother-in-law, stating that it goes to the kids. A conflict has erupted. Now she wants to sell it so the kids will quit fighting. My mother-in-law is saying she wants the checks made to the kids separately. Would it be better tax-wise for her to just sell it and split the money, and if there are any federal or state taxes to be paid, just let the kids give her the money? If she starts splitting the checks, who gets the 1099, and will there be a high tax rate? Is this the best route to conflict management?
The legal owner of the property is considered the seller of the property and will receive the Form 1099 reporting the sales proceeds.
Your mother-in-law should consider consulting with an attorney or certified public accountant to help her handle this transaction correctly. It will be money well spent, as there are several areas that need to be clarified when the property is sold.
If your father-in-law had a will and your mother-in-law is acting on behalf of her husband’s estate by selling the property and distributing the proceeds as required by his will, then the estate is the legal owner of the property. The estate would report the sale. Keep in mind that there is a “step up in basis” to the property value at the date of your father-in-law’s death that may help minimize any capital gains. Here is where the professionals should step in to help her figure this out correctly.
If there was no will and the property was left to her legally and she is just following her husband’s wishes in splitting up the proceeds so the kids will stop fighting, then there are other issues that need to be addressed. She would report the sale on her tax return, again taking into consideration that there is a step up in basis to the date-of-death value, once again possibly minimizing gains. But now it gets difficult because if she gives more than $14,000 per person during the year — that’s the annual exclusion for gift taxes in 2014 — then she will be required to file gift tax returns, and that is where professional guidance is needed again.
You can see that it makes sense to have a will that spells out your wishes. It is difficult for the surviving family members — especially for your mother-in-law, in this case — to move forward after the death of a loved one when everyone is fighting over money.
Thanks for the great question and all the best to you.
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