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Gift basis -- Long or short term -gift sale - comments/correction to my thinking


easytax

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Client mom died in 2015, sister had house sold to her for $1 sometime (2008 - 2010) thinking "best tax move" (:wacko:). House remained sisters personal property with mom living there and mom paying all repairs, maintenance, bills, taxes, etc. until death - no rents, dep., anything, etc.. House was not of course included in mom's estate. Sister sold house 2017 putting my client (her brother) on deed 2 weeks before sale (no sale to brother, just a gift to brother). Made 135+K profit (sales price less cost of sale less basis ($1)) with half of profit flowing to brother in letter from her closing attorney.

My thoughts -- Brothers basis is basically zero (since definitely a gain on sale, so FMV does not enter in here as it would in a sale of a "gifted" item and a loss) and we did tax estimates accordingly based on SHORT Term cap gain (became my clients as of two weeks before sale - so he held it only two weeks) ////. My question is -- is short term correct or should I be using the sisters original date of purchase as the brothers too? At short term tax due is 7K+ more than long term so we could save him some dollars.

Sister told brother her tax guy said she had a capital loss (????), so no tax to her and said brother should have no tax due either. Hence, I am rethinking/rechecking my self and wondering what (if anything) I might be missing. Only thing I come up with is difference from short or long term based on basis (cost is simple at $1, just the time has me wondering and I can find nothing that speaks to 'time", just cost, valuation, etc.). Looking at items where "Gifting" is involved almost always takes me more time.

Any comments, corrections, insight or general help IS appreciated.  THANKS in advance.

 

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For gifts, if the basis is determined using the donor's basis, the holding period includes the donor's holding period also.

That sale for $1 is used a lot so that there is transfer for consideration, but this is really a gift from mom to the daughter and probably no gift tax returns were filed. That $1 could have easily been replaced by something like "transferred for love and affection".  Daughter starting basis is from mom's basis in the home plus whatever she's added to it since then, and then daughter gifted a % of that to her brother, so brother would pick up that % share of the basis from daughter (his sister), probably 50% since she probably just tacked his name on that the sale was 50-50.  You didn't mention what the mom's basis in the home was.

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Mom basis was about 40K (will be confirming). I did not realize the $1 sale could be considered a gift and the daughter (in this case) would have a basis (to start) of more than $1 (mom basis of 40K). I was thinking a sale was a sale, etc. And the sales price was the daughters basis. 

I will also "LOCK" into my mind about using the giftor basis date for future information -- THANKS.    All other data will be recompiled as you have me on the correct track - now.

 

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I would ask to see "sister's tax guy's"  computations. If for no other reason, the reporting, if reasonably accurate, should be consistent. Or at least you would be able to justify the difference to your client. Beyond that comment, I have nothing to add to Judy's sage advice. She is spot on.

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I am not from PA and don't know how the real estate laws work there, so take this with a grain (or a truckload) of salt.  But I am wondering if this could be considered a life estate situation since Mom retained all of the incidences of ownership (paid the taxes, repairs, etc) and continued to live in the house. If it is considered a life estate situation, they may be eligible for the stepped up basis on mom's death. 

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Good thought but definitely not a "life estate". I am getting more detail as it seems all was done prior to 2008-2010 as originally told to my client and for "other" reasons he had no knowledge of (till now). Sister is more forthcoming now.  

Thanks again to all for thoughts and information.

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You seem to have an "implied" life estate.  Mom lived there, paid all the bills, and didn't pay the daughter rent.  I did extensive research on this before but won't be back in the office until Tuesday and can send you the details then if not too late.  The conclusion was clear: this house belongs in Mom's estate, and daughter gets step-up basis.  Peruse Section 2036(a).  A quick internet search turned up this, which gives you some court cases: https://elderlaw.info/2011/01/01/life-estate-can-be-retained-for-estate-tax-purposes-under-internal-revenue-code-section-2036-without-being-reserved-in-deed/

Brother gets half of sister's basis (stepped up).  Let me know if you want my brief.

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