House Sale Taxable?

House Sale Taxable?

My Dad transferred ownership of his house to my brother and me about ten years ago to so that if he went to a Nursing home it would not be lost. He had a clause allowing him to use the house till he past which occurred about nine months ago. We are now selling. Is this taxable?


Sounds like what was done was that your father conveyed the house to you and your brother by deed while retaining a life estate.

This had been a common elder law planning technique in that it gave your father the ability to continue to reside in his home, but the value of the home should not have been reachable to pay for nursing home and other health care costs. For anyone considering this planning going forward, it is quite complex and should only be undertaking with an attorney specializing in elder law (a subspecialty of estate planning).

Another consequence of this type of planning, is that when your father died, the value of the house would be included in his gross estate. This meant it would be subject to estate tax. When your father died the federal estate tax exclusion (the amount you could give away estate tax free was $2 million). So if his estate exceeded $2 million you have to file a federal estate tax return and report the value of the house. If his estate was under $2 million, check with the attorney handling the probate to make sure any state estate tax filing requirements are met. Many states have thresholds much lower then the federal amount (which in 2009 became $3.5 million). This consequence could prove quite costly, but, depending on the circumstances could be quite beneficial.

A consequence of an asset, such as a house, being included in your father's gross estate is that it generally qualifies for what is called in tax jargon a "step up in basis". This means that that if, for example, your father had purchased the home for $200,000 and when he died it was worth $2 million, the base on which gain or loss is determined for income tax purposes by the heirs is increased to $2 million.

So if you sold the house for precisely the value included in your father's estate, $2 million, you and your brother would have no gain or loss for income tax purposes. If you sold it for more than the amount it was stepped up to you might (see below) have a capital gain for the excess. If you sold it for less you might have a capital loss.

Another issue to discuss with your accountant (before you sign the contract) is what impact if any the handling of the house throughout the past nine months since your father died might have had on the tax consequences. For example, if you made any improvements to the house those might increase the tax basis. If you rented the house you may have to reduce the basis by depreciation "allowed or allowable", etc. Your accountant can help you out.

Be sure to consult with the attorney that handled the probate as there might be other twists and nuances that we cannot address given the limited space here and the lack of facts and documents to review. Some of these additional consideration might include:

  • Did your father's estate use alternate valuation. This is a tax rule that lets you value an estate for tax purposes at the date six months following death if the value of the gross estate and estate tax are both reduced.
  • What was done with the house, if anything, besides your father living in it?
  • Did one of you move into the house and use it as a principal residence?
  • What does the deed actually say?
  • Are you sure that there are no claims on the house?
  • Did the house decline in value subsequent to your father's death?

Get professional help, there could be lots of issues. Hopefully the discussion above will help you in that process.

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