Death on Property Question
Can you help with this question from a client of mine?
Hi, I am wondering if you could help answer a few questions regarding a sale of a house. This house was my mother-in-laws who passed away with a will to split the house equally (1/4) per child/step-child. However, right before she passed away, she put the house in her name as well as her oldest son who is the executor of the estate.
After my mother-in-law passed, my husband & his brother (the executor) went to an attorney to get the logistics of the executor’s name on the house vs. the will. We found out that by the executor being listed, it basically voids the will regarding the house.
The sale on the house will be final by Friday, January 27th . The executor is still going to fulfill his mother’s wishes of dividing the proceeds of the house amongst the 4 children.
Here are the questions:
The executor is taking the sale of the house and then keeping an estimate tax amount that he thinks he will be charged before dividing the remaining balance 4 ways. What is a normal tax amount for a house that one would be charged if the house was in his name?
When he distributes the ¼ share to my husband and I, do we then pay taxes on this amount? If so, what type of taxes and percent would this be?
What type of back-up documents do my husband & I need to file our taxes? The Will? Sale of the house? Letter from the Executors Attorney or Tax Advisor stating the estimate of tax with remaining balance to be split equally?
Any information you can help with would be greatly appreciated, or any additional information or comments would be great too.
Permalink Submitted by Alan Spross on Thu, 2012-01-26 01:44
This forum is dedicated to IRA and other retirement account issues. You may want to post this on a general tax forum.
That said, your MIL apparently created a joint tenancy with the executor under which the house passes by operation of law to the surviving joint tenant (executor), rather than under the will. He essentially was gifted 50% of the house and then inherited the other 50%. The cost basis of the house for purposes of the sale is then 50% of the appraised value at the date of her death (usually acceptable value is the sales price if sold within a short time after her death) PLUS 50% of the usual cost basis that was gifted to the executor. That would have to be determined based on whether the MIL herself inherited half and/or capital improvements made to the house over the years. This would be the executor’s cost basis for purposes of determining his capital gains tax on the sale. He may or may not have to pay much in cap gains since we don’t know what the cost basis will be, but you should be able to figure it out. The sale is reported on his 2012 tax return only.
The executor will have to make gifts of 75% of the net proceeds @ 25% to each of the other will beneficiaries. Unless it can be structured to limit the gifts to 13,000 per year or to make the gifts over a period of more than 1 year, he will have to file a gift tax return for himself. That will likely not result in any current taxes due from him, it just reduces his eventual unified gift and estate tax credit.
Gifts are not taxable to the recipients of the gifts. Therefore, for your joint return for 2012 (due in 2013), you will not report the gift. You will of course have to report any income you earn from investing the proceeds.
The real question here is how the executor will calculate the amount of each gift. For example, he may choose to deduct the capital gain taxes he must pay (if any) from the gross proceeds and then gift 25% of the remainder to each of the 3 other beneficiaries. On the other hand, if the house had NOT been put in joint tenancy in the first place, there would be a 100% adjustment to the date of death value. That would mean no capital gain on the sale at all and even perhaps a small capital loss due to the expense of sale that could have been passed through the estate to each will beneficiary. Then everyone’s share would have been slightly larger.