Contact UsWhat are the tax consequences when we sell the house my wife inherited from her father?
In 1998 after my wife's mother passed away her father set up a joint tenancy of the family home with himself, my wife, and her sister as joint tenants. The home had been purchased more than forty years earlier in the 1950s. He has recently passed away. The house today is worth between $250,000 to $300,000 and my wife and her sister intend to sell it. The home and all of us are in CA. Is there any federal or state income tax on their respective half shares of whatever the sale price is? If a gain is the only taxable portion is it based on the value of the home at the time of his death - or would it be based on the value of the home in 1998 when the joint tenancy was created? Lastly, in terms of tax implications do they need to complete the sale within a certain time limit - such as one year - in order to prevent themselves from higher taxes - independent of any further increase in value and sale price?
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Tax Professional Answers
John Stancil
That's a complex basis calculation you have come up with. Just for what it is worth, your wife and her sister would have had little or no tax liability if their father had kept the title in his name only, and they inherited the entire house.
This is best illustrated through an example. Let's assume they purchased the house in the 50's for $10,000. When her mother passed away, their father inherited her half. Assume the FMV at that time was $110,000. Half of that was inherited, so his basis is now $5,000 + $55,000 = $60,000. That is his original half plus the inherited half.
Then he gives an interest in the house to your wife and her sister. When a gift occurs, the donee receives a transferred basis in the property gifted. Since his basis was $60,000 each of them have a $20,000 basis in their share of the house.
When he died, the sisters inherited his 1/3 of the house. Assume that the FMV on the date of his death was $240,000. His one third is $80,000 so each sister adds $40,000 to their basis. $40,000 + $20,000 =$60,000 is the basis each has in the house.
When the house is sold they will have to pay tax on the sale price minus costs of sale less their basis of $60,000. So if the house is sold for a net $250,000 each of them gets $125,000. Subtract their basis, and they pay tax on $65,000. This will be taxed at the capital gain rate.
The only effects of a delay in the sale are 1) change in the gain due to increasing or decreasing prices, or 2) An increase (or decrease -unlikely) in the capital gain tax rate.
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470 weeks ago
This is best illustrated through an example. Let's assume they purchased the house in the 50's for $10,000. When her mother passed away, their father inherited her half. Assume the FMV at that time was $110,000. Half of that was inherited, so his basis is now $5,000 + $55,000 = $60,000. That is his original half plus the inherited half.
Then he gives an interest in the house to your wife and her sister. When a gift occurs, the donee receives a transferred basis in the property gifted. Since his basis was $60,000 each of them have a $20,000 basis in their share of the house.
When he died, the sisters inherited his 1/3 of the house. Assume that the FMV on the date of his death was $240,000. His one third is $80,000 so each sister adds $40,000 to their basis. $40,000 + $20,000 =$60,000 is the basis each has in the house.
When the house is sold they will have to pay tax on the sale price minus costs of sale less their basis of $60,000. So if the house is sold for a net $250,000 each of them gets $125,000. Subtract their basis, and they pay tax on $65,000. This will be taxed at the capital gain rate.
The only effects of a delay in the sale are 1) change in the gain due to increasing or decreasing prices, or 2) An increase (or decrease -unlikely) in the capital gain tax rate.