DEAR BENNY: My mother passed away in June leaving her home (which she owned free and clear and is located in Northern California) in equal shares to me and my two siblings. My brother is the executor of the estate and has petitioned the court to open probate.
However, before we get too far along in the process I thought we should get answers to some of our concerns about inheriting and possibly selling the house. Specifically, I have heard that as children of the deceased owner of the house, we qualify to own this house and pay taxes for it based on the price that my mother paid for it, rather than its current value (a difference of approximately $300,000). If we are able to keep the tax basis the same and we decide to sell the house after some time without ever living in it, will we be subject to a capital gains tax on the difference between its selling price and the price my mother paid? Must we sell the house through the probate process to avoid getting taxed on a portion of the sale? What other considerations come in to play when inheriting a house and co-owning (or selling it) with trusted and true siblings? –Max
DEAR MAX: Because I do not practice law in your state, I will respond only to the federal income implications. Your brother has retained counsel to institute probate (or at least he should have an attorney), and that lawyer should be able to answer many of your questions.
Let me give you this example: Your mother and father bought the house years ago for $50,000. Their respective basis for tax purposes was $25,000 each. Your father died 10 years ago when the house was worth $100,000. In tax law, there is a concept called the “stepped up” basis, which means that upon the death of one owner, the tax basis for the heirs is determined on the date of death (this is oversimplified for my example). So, half of the value of the house was transferred to your mother, so now her basis is $75,000 (her original $25,000 plus the $50,000).
Now, at her death, the property is appraised at $400,000. The three of you will inherit the house and your tax basis will be $400,000. If you sell it for that price, you will not have to pay any capital gains tax. If you sell it for more than $400,000, the capital gains tax will be based only on that difference.
Of course, if one or all of you decide to move into the property and live there for two years out of the five years before it is sold, you can take advantage of the up-to-$250,000 exclusion of gain (or up to $500,000) if you are married and file a joint tax return.
Ask your lawyer about the probate process.
DEAR BENNY: In 2007, we sold our home where for 10 years we ran a home-based computer business and claimed home-office expenses. I understand that we must report depreciation taken for that period on our 2007 income tax return. Is the total depreciation taken over 10 years taxable? Is it ordinary income or capital gains? We also sold the trade name and client list for $20,000 — no property or assets. I have downloaded numerous publications and instructions from the IRS and cannot find definitive information on tax treatment for this situation. –Texas
DEAR TEXAS: I hope you were taking depreciation for all of the years you claimed your home-office expenses. In tax law, there is a concept called “recapture,” which means that when you sell the investment property (or in your case a portion of the property, which was the home office) you have to pay income tax on the amount of the depreciation.
However, tax law is a highly specialized area, and my best advice is for you to retain a certified public accountant (CPA) who can assist you in filing your 2007 income tax return. He will tell you that the portion of the house that was your principal residence will probably be eligible for the up to $250,000 exclusion of gain (up to $500,000 if you are married and file a joint return), but the tax treatment of the home office will be different.
DEAR BENNY: We are looking for software to manage our apartment properties and strip malls. What do you suggest? –Maryleu
DEAR MARYLEU: Whenever I have to research something, I go to my favorite search engine on the Internet. I searched for “apartment rental software” and found many sites from which to choose. You should make sure that you can get a trial period to make sure that any such software that you do purchase will suit your needs.
DEAR BENNY: My mother-in-law has been living with a 48-year-old man in the same house for the past 10 years or so (not married). Only his name is on the mortgage and deed since she was not working and is retired. They both bought the house and both contribute to the monthly payments. His health may be failing and the family is concerned her interest is not covered because she shows up nowhere on any mortgage, deed, papers, etc. –Doug
DEAR DOUG: Have you or your wife talked to your mother-in-law? Does she understand that she does not have any interest in the property? In fact, have you checked the land records in the county where the property is located to confirm that she is not on title?
While siblings can always raise questions so as to protect their inheritance, only your mother-in-law can solve the problem — if indeed there is a problem. Did you ever consider that your mother-in-law may actually want this guy she has been living with to get the house on her death?
Of course, should he die first, then his heirs will get the house and your mother-in-law — and her children — will get nothing. This fact should be called to her attention.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to [email protected].