Q:

Hey Kerry,
 
My sister & I are still fighting with my dad's girlfriend for our share of the house she said she'd buy from us two years ago.  My sister talked with a former classmate of ours who said that we will have to pay gains taxes on what our share of the house was worth when my dad died....well, we haven't received any cash, we haven't received any interest on our "share"..in fact we paid his girlfriend $800 a month (because Dad was contributing that much) until last October when she walked away from the escrow she opened and the contract she signed to buy us out.  Since then she's gotten her own attorney who told us..."so go ahead & sue"...and our lawyer said he'd want $40K of the $65K he'd recover for us....so we haven't done that.....My sister & I believe we have a plan that will cause the girlfriend to buy us out or the mortgage co will force the sale of the house right now and we'll be lucky to receive $65,000 cash for me & my sister to split.
 
So will we have to pay gains on the $112,000 or the $65,000 ?  can we collect $65,000, pay gains on that and write off a loss on the difference between the $112,00 and $65,000 ??

A:

That sounds like quite a mess.  When I give speeches and seminars on estate planning, I always say that Hollywood movies are accurate in their often cartoonish portrayal of the family infighting that results from a relative passing away as everyone fights for what they consider to be their fair share.

I have no idea what that former classmate of ours is doing in regard to the tax profession, but what she told you about paying taxes on your dad's property is 100% wrong.  Is she perhaps working for the IRS?  The only possible tax would have been if the net estate was worth more than one million dollars, and the tax would only be on the amount over $1,000,000.  That would have been payable by the estate.  You and I discussed the valuation and you were confident that the gross estate was well below the million dollar threshold for even filing an estate tax return.

There are only a few things in this country that are statutorily exempt from tax to the recipient.  Gifts, life insurance pay-outs and inheritances are the most common tax free items for recipients.  The only kind of inheritance that is taxable is tax deferred retirement accounts, and those can usually be rolled over tax free by the heirs.

Other assets received as inheritance are completely tax free to the recipient.  The big issue then is to establish the heir's cost basis for when s/he later sells it to see if there will be a taxable gain or loss.  That is the asset's fair market value as of the date of death.  As long as you don't move into the house and convert it to your personal use property, you are looking at a deductible loss when you do sell your share.  The critical thing to protect against any IRS challenge is to get documentation from a Realtor or Appraiser of the property's value as of the date your dad passed away. When you finally succeed in selling your share of the property off, we can report the net loss.  As investment property, the loss will be netted against your other investment capital gains and losses and subject to the ridiculous $3,000 net deduction against other types of income, with any excess carried over to future years.

I have no idea why she would tell you that the property was taxable to you as the heir.  That has never been the case as long as I have been in this profession; so this isn't even a new change.

I hope this helps.

Good luck.

Kerry

Follow-Up:

Kerry

Thank you for your complete answer and clarification on the matter.
 
I remembered the 1 million exemption after I sent you the email.  It was my sister who contacted our former classmate, no she hasn't been working for the IRS.
 
We did have an appraisal done within 90 days after dad's death.
 
Thank you, Thank You,Thank You.
 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/10/2009 09:13:00 PM Send this post: