Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Parent/child JTWROS real estate capital gain strategy?
Posted by: luke_airig, January 13, 2017 02:07PM
I am unmarried and have no siblings.
My father died in 1998.
My mother's current will designates me as sole beneficiary of her estate.
I have neither bought nor sold any real estate other than the two properties mentioned below.

My mother and I (California residents) purchased a single family house in California in 1999 with vesting as joint tenants with right of survivorship with a purchase price of $400,000. My understanding is that we each had an original basis of $200,000 (half of $400,000).

It was and is her primary residence. It has a current estimated market value of $800,000 and is owned outright with no current mortgage balance.

No improvements have been made.

I have never resided there and my primary residence is another single family house in California, purchased in 1983, which has a current mortgage balance of $60,000.

All costs (down payment, monthly mortgage payments, taxes, insurance, maintenance, improvements, etc.) and benefits (mortgage interest, property tax deductions) have been split evenly between us.

Both of our tax filing statuses are 'single'.

Assuming she pre-deceases me and the house is then sold for $800,000, it is my understanding that I will get a stepped-up basis on her half of the current asset market value at date of death. So, using the current estimated market value of $800,000 as an example, it is my understanding that her stepped-up basis at death would be $400,000 (half of $800,000). So my basis at that point in time would be $600,000 (my original basis of $200,000 + her stepped-up basis of $400,000), with a capital gain of $200,000.

I am somewhat familiar with the provisions of IRS pub 523 and I would like to come up with a tax planning strategy that will minimize/eliminate my anticipated capital gain without my having to meet the pub 523 residence requirements for the $250,000 cap gain exclusion. I have not ruled it out as a possibility but at this point I would prefer not having to move from my current residence if I can come up with a viable alternative plan.

Would it make sense for me to quitclaim my ownership? Gift my ownership to her? Create some kind of properly structured Trust?

Can anyone suggest a strategy to accomplish this? Something along the lines of transferring title to my mother with no adverse tax consequences that will give me full stepped up basis or some other option that will accomplish capital gain tax elimination/minimization.

Any help or suggestions are greatly appreciated.

If my understanding/interpretation or calculations are incorrect, please let me know.

If I have omitted any details that may be relevant, please let me know and I will provide them.

TIA

Luke


Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: triad, January 13, 2017 11:45PM
If you want to avoid capital gains tax on "your share," you need to move in for two years as your primary residence (the strongest proof being that you sell any current residence) and then sell.

Your plan to either have mom gift the property to you (IRC 2035 should be reviewed) won't work as you would get her cost basis.

Your plan to otherwise gift it to her invokes form 709 for you (permanently using up some of your estate exclusion) in the hopes of getting a stepup when she dies is also risky (see IRC 1014).

If there is still a mortgage, the bank may demand repayment in full if you try either of these stunts.

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: Drewremedy, January 15, 2017 03:46PM
IF Mom has an effective life estate to be there I'm not so,sure you don't get a full step up in basis...at least room for more homework

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: Drewremedy, January 15, 2017 04:14PM
ALso the entire estate might get stepped up with the first to die ....

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: triad, January 15, 2017 10:54PM
Co-owned property will not get a 100% step up unless a) the co-owners are married to each other and b) this is a community property state.

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: Drewremedy, January 16, 2017 01:30AM
OP is not clear if she contributed 1/2 of the purchase price or not .....if Mom merely added daughter to new deed as JTWROS but retained sole use of the property until she dies the gift may ,have been incomplete ...good news in this example?

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: 47Percent, January 16, 2017 04:10AM
The OP was very clear about how it was purchased, and subsequently maintained. 50/50 down the line.

No need to worry about any lending bank as the OP clearly stated there is no mortgage.

I see there are (at least) four things to watch out for with the strategy.

a) The step up works only if your mother holds on to the property at least for a full year before anything unfortunate happens. If not the whole exercise fails.
[www.naepc.org]

b) There is always a risk that your mother might change her mind and leave you out of the will either intentionally or unintentionally. Once you transfer the property to her name it is hers to do as she pleases. If she enters into a questionable con-deal like reverse mortgage or any one of those scams, there is literally nothing you can do. The only silver lining would be you wouldn't have any capital gains to worry about!

c) All the "benefits" such as mortgage interest (if one is taken out at a later time) and property tax deduction etc. from the time of your gift till you ultimately receive the full property will accrue solely to your mother. Also, She would be fully responsible for all costs as such, although you could continue to help out. Any such payments would be considered 100% gifts in the year given.

d) As you would be gifting a property worth $400K, you would need to take it out of your life-time gift tax exclusion. But I suppose that shouldn't be a problem with the current limit of $5+ million.

I see b) as the main issue you need to be at peace with. If okay with all the above, consult a CPA and go for it.

===
one additional thing came to mind after posting. Your county assessor may treat this as a transfer of property and jack up the property tax rate. Prop 13 in California protects you from property tax spikes only until a transfer. Check with the county office how they would handle this before you take any action.

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: Drewremedy, January 16, 2017 01:08PM
Yep, I misread that OP had been paying .

There is one more exposure to recycling it back to Mom, your place in line re her creditors is lost and in particular if Mom were to need Medicaid those claims would be ahead of you..be careful.

I still think some more homework as to state law re first to die may work and the possibility that her apparent life estate may work to your advantage.

There are some quirks as to making a gift to somebody for the intending of getting it back with stepped up basis ....I don't recall details but it may well be a one year holding period as mentioned above . Also in my jurisdiction , but I'm not in CA, such a gift and later transfer by will would be two transactions each subject to tax and reapraisal or relevant intra family exclusion.

Re: Parent/child JTWROS real estate capital gain strategy?
Posted by: Drewremedy, January 17, 2017 11:27PM
Even if Mom gave up all parts of JTWROS and the OP held all elements of offical deed and paid all expenses, IF Mom retained a life estate or merely just lived there to the end, it is very possible that the entire home falls under section 2036 dealing with life estate and there is a good pile of cases and rulings on that stuff. Step up when Mom passes ...unless Mom unwisely surrenders the life use a bit ahead of passing ......



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