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It is pretty safe to assume that the FMV was greater than the mother's adjusted basis just before gifting the house, in which case the daughter's basis is the same as 50% of the mother's at the time of gifting.  When the mother died, the mother's 50% gets stepped up basis.  

Probate rules are different in every state, so what is required in NY may not necessarily be true in MO.  

In MO, when home or land owned as joint tenants with a right of survivorship, or tenancy by the entirety, the joint tenants own the real estate on the death of the decedent.


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I think child's basis is the sum of:

  • For the gifted portion - it's either 50% of mother's basis if it would result in gain, or FMV @ time of gift if it would result in a loss, plus
  • cost of 50% of any improvements between the time of gift and DOD, plus
  • accounting for 50% of any other adjustments to basis between gift and DOD (one example:  gov't eminent domain transactions), plus
  • the remaining 50% inherited portion @ FMV

I do also think that the mother's 50% would may need to go through probate.  (edit: changed to "may", as Max said, depending on state law)

Edited by jklcpa
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Oops, I see Bart asked "when".   Daughter's acquisition would have 2 dates:  the date of the gift for the first 50% and remaining 50% at the DOD.   For tax reporting when sold, it could be broken into the 2 pieces, but since inherited property (the 2nd 50%) is always treated as long-term, I'd probably just report it as one transaction and keep track of the basis in the event it is questioned.


31 minutes ago, Evan S. Golar said:

What about the 50% that was gifted but no gift tax return filed?


Bart didn't say if that return was filed or not.  If not, file the gift tax return for the year of the gift, use up some of the unified credit, and have the executor sign on behalf of the deceased.  There should be no penalty.

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It sounds like Mom held a life estate in the property as the daughter did not receive the property until Mom's death.  Based on "Pursuant to ' 2036(a) of the IRC, the transfer of a residence with a retained life estate permits the transferee of the residence to receive a full step up in his or her cost basis in the premises upon the death of the transferor, to its fair market value on the transferor's date of death. This occurs because the residence is includible in the gross taxable estate of the transferor upon his or her demise. This, of course, presumes the existence of an estate tax upon the death of the transferor. A "life estate", pursuant to IRC ' 2036(a), is the possession or enjoyment of, or a right to the income from the property or the right either alone or in conjunction with another to designate the persons who shall posses or enjoy the property or income thereof."

I believe the property receives a full step-up in basis upon Mom's death.

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