Need some tax advice please--grandparents' house sold

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Pennypacker

New member
Does anyone have any advice on how to avoid or minimize tax on gains from the sale of a house? My grandparents' house has recently been sold (they passed away a while back) and my mom is receiving a portion of the proceeds, with the rest going to other family members. She has very generously offered to split the money three ways between herself, me, and my brother.



Is there an optimal way to handle this to minimize tax, or even avoid it altogether? My mom has an investment account, but my brother and I only have standard checking and savings. The escrow officer (I think that's who she is) asked for my banking info today so that the money could be directly deposited into my account, but I passed because that seemed like the worst way to lessen the tax burden. In fact, that's not really doing anything.



I'd very much appreciate any input from anyone who has knowledge or experience in this area.



TIA
 
Although I know a bit about taxes I am not knowledgeable enough to give you a definitive answer. After that disclaimer I will give you a FWIW. Any minimizing of tax consequences would have had to be done by your grandparents through estate planning. The way you described the situation your mother, and not you or your brother, inherited the proceeds of this house.



If that is true I believe your Mom would be subject to California estate/inheritance taxes (they are different in every state). I don't think you or your brother would be subject to any of those taxes since you only received a "gift" from your Mom. Most likely the "cost basis" of the house for computing any gains/losses (for your mom) would be its value at the time of your grandparents death......not what your grandparents paid for it.



I am fairly certain that irregardless of who inherited or received a gift that it doesn't matter where the money is deposited. You would be subject to the same amount of tax no matter how you receive the money.
 
Your mom can gift it to you tax-free as long as she keeps the money flow under 12,000 a year.



Gifts made under the so-called $12,000 tax-free-gift rule (more on that below) will not trigger any federal gift taxes, nor will they reduce your federal gift- or estate-tax exemptions. However, gifts in excess of the $12,000 "freebie" will reduce both exemptions dollar for dollar. Only if you're so generous during your lifetime that you completely burn through your $1 million gift-tax exemption will you have to start paying federal gift tax. Even then, the tax only hits gifts in excess of the $12,000 figure.
 
Thank you for the feedback!



OutlawTitan, good to know about estate planning on the part of my grandparents being the key factor. That makes sense. You are correct that it's my mom who is actually inheriting the proceeds. She is then subsequently transferring 1/3 to me and another 1/3 to my brother. I think the capital gain is going to be substantial because the house was originally purchased by my grandparents in 1906.



themightytimmah, thanks for describing the gift taxes. I assume that $12,000 figure is per person?



Thanks again guys!
 
Pennypacker said:
Does anyone have any advice on how to avoid or minimize tax on gains from the sale of a house? My grandparents' house has recently been sold (they passed away a while back) and my mom is receiving a portion of the proceeds, with the rest going to other family members. She has very generously offered to split the money three ways between herself, me, and my brother.
Click to expand...



(It appears you have multiple questions and material facts have been omitted.)



Federal law says the first $500k of gain is tax-free for a married couple. Did they have in excess of $500k gain when the house was sold?





I'm not certain I understand your 2nd paragraph. Are you asking how to minimize any taxes due as the money grows in your bank account?



Mom can gift far in excess of $12k/year without any tax consequences as long as she files the required documentation.



When someone dies, taxation can occur at several levels. While the sale of the house may be tax-free at the federal level, it may not be tax-free at the state level. That is determined by state law where they resided.
 
tom,



Thanks for your advice. Regarding the 2nd paragraph, I was wondering more about whether or not there would be any tax impact as a result of how my mom distributes the funds themselves. I realize now that there would not be any effect since the transfer would be considered a gift. Since she has not used any of the $1 million lifetime exemption, it sounds like this is a non-factor. Even if it has to be reported on her tax filing, any excess beyond the $12k would just lower the exemption a little bit.



However, I suspect capital gains tax will have to be paid. I'll ask my mom to deduct 1/3 of my tax share as soon as we know how much that is. Right now, I don't know. For clarification, this house belonged to my grandparents on my dad's side, who had seven brothers and sisters. My dad passed away several years ago and his portion was transferred to my mom. She has no connection to the house other than the fact that she is one of several names on the deed. So because she hasn't ever lived there, looks like there will be at least some capital gains tax to be paid.



kpounds,



Thanks very much for that link. Very handy indeed!
 
Capital gains are paid by the previous owner not the current owner. You Mother will not have to pay capital gains taxes when the estate is sold. If any are asessed against your grandparents estate they are paid before you mother receives the money.
 
Autoeng,



By previous owner, do you mean my grandparents? When they passed away, she became one of the owners. At least that's what I'm thinking as her name is on the deed.
 
Pennypacker, Clark Howard and staff are *really* good at these kind of situations. I dont know much about it myself and they might say to consult a tax pro, but I think they're definitely worth a call. They'll do their best to give you good advice. I believe his help number is the Consumer Action Center# on his website.



Funny enough, his latest book is called Clark Smart Real Estate.
 
Pennypacker said:
Autoeng,



By previous owner, do you mean my grandparents? When they passed away, she became one of the owners. At least that's what I'm thinking as her name is on the deed.
Click to expand...



The tax gain write off would apply to the value that the property increased from the time that your g-parents purchased until their deaths. So, if the property was purchased for $50,000 and at time of last g-parents death it was worth $550,000 there would be no capital gain tax (they got a $500,000 allowable increase in value). Now that your mother is part owner the initial value of the property would start at $550,000. If between now and when it sells it would go up in value to more than $1,050,000 then your mother and other heirs would owe no capital gain tax as well.
 
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