Sale of Residence...

[MN2V]

Parents sold home and moved to assisted living apt. Children's names had not appeared on property tax statements in

previous years (don't know how important that is)

but when the sale occurred, 2 adult children each received 32% of the sale price and a 1099-S.

I meet with one of the adult children Monday and need to be prepared for his answer to my question as to when the

32% was gifted to him.

Can someone give me best/worst case situations and which form I start on? I know I can figure the basis but

I am unsure about business or personal, capital gain or ordinary. Thanks.

[ed_accountant]

First you should read IRS publication 523, Selling your Home:

http://www.irs.gov/pub/irs-pdf/p523.pdf

You will need to determine the parent's cost basis of the home, purchase price plus improvements. The parent's cost basis will transfer to the children since this is a gift. Therefore, 32% of cost basis can be allocated to one child. The children may have a taxable gain if they did not live in the home 2 out of the 5 years prior to the sale.

You should read the IRS publication to determine and become familiar with the rules for gain exclusion for a sale of a home. Having the publication handy will also give a resource to refer to your client...

[MN2V]

I guess I didn't make myself clear. The children did not live in the house at all. So there is no exclusion for them. I know how to figure the basis for them, I just need some support as to if it is personal or considered an investment sale...

[David1980]

Wow, talk about failing to call your tax person before doing something... I'm not positive so I won't say anything for sure but it sure seems like they did that one wrong.

[Joel]

MN2V

If the children's names did not appear on earlier tax records then the gift did not occur until the time of the sale. The parents basis would be used to determine their cost basis. I would consider investigating further the actual sale. Was it the intent of the parents to give the house to the children or was it their intent to split the proceeds with the children and the closing company errored in preparing the documents and possibly could be amended. I would look into it further.

[MN2V]

I am sure their intent was to take some of the parents money before they had to go into the nursing home(which the father has now done, the mother has recently passed) so when I determine when the gift was made can I consider it a capital gain sale? The reason I am trying to think of everything here is that I do taxes for one sibling and another preparer does the other sibling taxes, and is very agressive...so there will be questions if we don't do it the same.

[kcjenkins]

The kids might be SMART [after the fact, of course] to consult an attorney and get a legal opinion on when the gift occurred. If the gift was made AFTER THE SALE, a gift of the proceeds, then the parents would have an excudable sale under §121, and the kids would have no income at all, although there might be gift tax, depending on the amounts. But if the gift was before the sale, as the paperwork implies, then the kids basis is the lower of donor's basis or FMV.

What YOU need to be careful about is giving them legal advice, since that could come back to bite you if the position they take is later challenged by the IRS. I'd advise you, given the paper work that your client has now, is that, absent a legal opinion to the contrary, you have to report this as a Sch D sale of a personal asset, which would be a long term capital gain, as his holding period is the parent's holding period.