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Author: LAnML Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121354  
Subject: Capital Gains Exemption For Deceased Date: 6/18/2004 1:22 AM
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My mother passed away this year. My father and her have owned and lived in the same home for 40 years. They paid $18,000 for it and now it is worth $350,000. If my father sells their house this year, when he files their joint tax return can he only claim the $250,000 exemption and then have to pay taxes on the difference? Or can he claim the balance of the gains as an exemption for my mother?
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Author: ONuallainxx One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72269 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 6:28 AM
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While it is true that your father will be limited to his $250,000 exemption, the taxable gain will be considerably less than the $332,000 your question implies.

The reason is that upon your mother's death, her half of the house enjoys a step-up in basis to it market value on the date of her death.
Thus, the basis in your father's hands will be $184,000 representing his half of the original basis ($9,000) plus half the market value of the property on your mother's death ($175,000).

Assuming he sells at $350,000 the gain will be only $175,000 - well under the $250,000 exemption.

I note that the (apparently) joint tenancy was created prior to 1977. If your father can demonstrate that he provided no part of the value that went into the acquisition of the property and that your mother provided the entire cost, the property would enjoy a 100% step up in basis in your father's hands. (Hahn v. Commissioner, 110 T.C. 1040 (1998)).

While probably inapplicable to your situation, surviving spouses whose acquired joint tenancies with a spouse prior to 1977 and whose spouse dies after 1981 can take advantage of this rule. The flip side, however, is that if 100% gets the step-up then 100% gets included in the estate of the first spouse to die.


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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72270 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 8:47 AM
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My mother passed away this year. My father and her have owned and lived in the same home for 40 years. They paid $18,000 for it and now it is worth $350,000. If my father sells their house this year, when he files their joint tax return can he only claim the $250,000 exemption and then have to pay taxes on the difference? Or can he claim the balance of the gains as an exemption for my mother?

My condolences on your loss.

It's a bit ghoulish, but your mother is filing the 2004 return also, even though she won't have a lot of input to it. Both she and your father meet the ownership and use tests for excluding gain, so up to $500,000 of gain can be excluded if the house is sold in 2004.

However, I wouldn't advise your father to sell just because of that. As has already been noted, the step up in basis will probably take care of enough of the current gain to get his gain below $250,000 if he sells sometime later.

For full details see IRS Publications 523 and 551.

Phil

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72271 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 9:47 AM
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My condolences on your loss.

It's a bit ghoulish, but your mother is filing the 2004 return also, even though she won't have a lot of input to it. Both she and your father meet the ownership and use tests for excluding gain, so up to $500,000 of gain can be excluded if the house is sold in 2004.

However, I wouldn't advise your father to sell just because of that. As has already been noted, the step up in basis will probably take care of enough of the current gain to get his gain below $250,000 if he sells sometime later.


My condolences as well.

Phil is correct. Through a quirk in the tax laws, under the right set of circumstances, a surviving spouse could take advantage of both a 50% step-up AND the $500,000 gain exclusion to escape taxation on a million dollars of gain if the house is sold in the year of death.

Ira


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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72272 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 10:06 AM
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I don't think the original note indicated the state of residence. But if it's a community property state, they get the step-up in basis on both halves of the property.



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Author: HokeySon One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72273 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 10:47 AM
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using this opportunity to ask a question

I remember my tax professor saying over and over again that holding property in a joint tenancy had adverse tax consequences when compared to a tenancy in common. my (foggy) recollection is that the reason was a TIC got a stepped up basis on the whole property while JT only got a step up on half (but could avoid legal issues on transfer). Now, after many years, I am questioning my recollection (and wishing I had paid more attention). Can someone confirm or refute my memory? thanks.

I would also appreciate the source of the entire step up in Community property states -- that is not something I remember at all. thanks again.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72274 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 11:07 AM
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My condolences. It must be a difficult time.

Inheritance is complicated. He maybe entitled to a new basis on the entire value depending on how the property is titled or if it is a community property state. Whoever is handling the probate should be able to tell you which is true.

Debra

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72275 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 11:13 AM
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I would also appreciate the source of the entire step up in Community property states -- that is not something I remember at all. thanks again.
________________________________________________________

The actual source is Internal Revenue Code §1014(b(6).
For a plain-english version, the following is from IRS Pub. 551, Basis of Assets:

Community Property

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return.

For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse's estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse's heirs is also $50,000.




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Author: LAnML Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72276 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 12:33 PM
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Thanks to all who answered. My parents live in California, a community property state. My dad is 88 years old and planning on selling the house and moving into a senior's assisted living community. Last week he set up a living trust with the help of an attorney. When he receives the death certificate he plans on changing the title of the home from both parents to the living trust. Will the title change affect his tax breaks when sells the house this year (or next year)?

I will be back out to see him in a couple of weeks and plan on setting up a meeting with an accountant. But I'm worried if he changes the title now it could affect his taxes.

Hope these aren't dumb questions, just trying to protect his interests so we will have enough money to take care of him.

Thanks

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Author: HokeySon One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72277 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 1:40 PM
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In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return.


________
Thanks for the information. Does that not then mean that if the property is held in JT only one half gets a stepped up basis because due to the right of survivorship, transfer is automatic and does not pass as a part of the decedant's estate?

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72278 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 1:55 PM
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In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return.


________
Thanks for the information. Does that not then mean that if the property is held in JT only one half gets a stepped up basis because due to the right of survivorship, transfer is automatic and does not pass as a part of the decedant's estate?

_____________________________________________
No. The whole thing is stepped up. The provision refers to the TAXABLE estate, not the PROBATE estate. The taxable estate can include joint assets, life insurance, retirement plans, and other things that don't pass through probate.



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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72280 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/18/2004 8:46 PM
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Does that not then mean that if the property is held in JT only one half gets a stepped up basis because due to the right of survivorship, transfer is automatic and does not pass as a part of the decedant's estate?

Joint Tenant with right of survivorship is different that Joint Tenant. Are you certain how the property is titled.

Debra

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Author: HokeySon One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 72292 of 121354
Subject: Re: Capital Gains Exemption For Deceased Date: 6/21/2004 3:07 PM
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No, a right of survivorship is the essence of any joint tenancy; you can own property jointly in other ways, but if you hold as joint tenants a deceased party's interest passes to the remaining joint tenants automatically by operation of law.

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