Posted on 01/06/2013 11:03:40 AM PST by dhs12345
My dad is in a nursing home and we need to sell his house to pay expenses.
We have researched the tax laws and apparently, the threshold is $250K for capital gains. Anything above $250K is taxed at the capital gains rate. What is is now, 28%?
This seems unreasonable but apparently true. At one point, I thought that all value for the place of residence could be excluded. Or the threshold was very high.
My dad is by no means rich and he has lived in the house fifty + years.
He paid $20K back in 1963.
Agreed. We are planning on it. Thank you.
Where did you get the idea you can correct the basis for inflation? I’ve never heard of that.
The formula for calculating your cost basis on your main home is as follows:
Purchase price
+ Purchase costs (title & escrow fees, real estate agent commissions, etc.)
+ Improvements (replacing the roof, new furnace, etc.) [NB - from About.com - I think maintenance is excluded and roof and furnace are maintenance items]
+ Selling costs (title & escrow fees, real estate agent commissions, etc.)
- Accumulated depreciation (for example, if you ever took the office in the home deduction)
= Cost Basis
Oops. Sorry for the double post.
Saw the other person saying to check with nursing home staff... They might have some info, but in reality can you say “Conflict of Interest?”
We had an extremely complicated, multiple joint owner property issue with our mom. We started looking into things in 2007, and my mom’s attorney said we were too late to do anything. So atty’s don’t always give you good advice.
It took until last April to get things arranged the best way we could, given the law at the time and provided the state law doesn’t change. We went through a total of 5 different attys/firms until we got to the 5th one. (4th one was family law specialist, ended up referring us to the 5th atty specializing in elder law.) Our first appt. with her was in Feb. of 2012 and she figured out the best options for us and had everything wrapped up by the end of April. Including wills in place for me and one of my sisters, as well as current transfer on death deeds.
Best to you...
Talk to a tax preparer.
I believe the cap gain tax has increased but not on real estate.
Your father had five years to sell after move out and he gets $250,000 exemption. If mom lived there he mastill get her $250,000.
Note states may have a separate cap gain tax on top of the Feds.
Talk to your dad about a trust if he doesn’t have to sell. Trustee can sell house at value at time of death with no cap gain tax.
$500k for married; $250k for single. BUT, when your spouse dies, I’m pretty sure you can reset the basis to market value on the date your spouse passed. That’s what our financial advisor has told us.
Cash out refi would make sense if you want to avoid capital gains.
There are many possible tactics. I suggest you consult wit a tax attorney.
The main thing is, after taking out the $250K, how much is the gain? If it is under $200K, then the capital gains tax rate would be 15%. If you have medical expenses, then there would be itemized deductions. You also have to look at the basis of the house, and see if you can find any qualifying improvements that would reduce the gain. Is the house entirely unchanged from 1963?
We were planning to pay the nursing home from the proceeds from the house and we estimate that he will run out of assets in 5 months.
I had overlooked the value step-up. But doesn’t that depend on how the house was held, and whether it’s a community-property state?
You’re looking for Schedule D Capital Gains—Instructions
http://www.irs.gov/pub/irs-pdf/i1040sd.pdf
It’s online—they have the 2011 instructions. Very important information due to your mom’s passing—the $ 500,000 threshold is not out of the question depending on meeting certain tests—see page D-2 right hand side.
A good accountant can steer you straight. Do not take advice from the nursing home staff under any circumstances.
Thanks for all of the suggestions!
We have been reviewing the tax laws. But we will contact an attorney.
Gain above $250K may be around $120K. And we will be able to deduct his nursing home expenses. Still, there will be a considerable remaining taxable amount.
Yes, there have been many improvements over the years. But proving it and providing values on, for the example the garage which was build in 1971 might be difficult. Maybe an appraisal of the “improvements?”
Ya. We have been looking at this form.
Thank you for the suggestions!
Good point. Yes, the rules are different in community property states and are more complicated (AZ, CA, ID, LA, NV, NM, TX, WA, WI). Money earned by either spouse during marriage and all property bought with those earnings are considered community property that is owned equally by husband and wife. Debts incurred during marriage are generally debts of the couple. At the death of one spouse, half of the community property goes to the surviving spouse unless the one who died left a will that directs otherwise. (Courtesy Nolo).
Best to consult a tax advisor or attorney. Our attorney figured all this out for us and I don’t recall all the details (we live in CA - lucky us!).
Thank you!
You stated that your parents paid $20K for the house in 1963. That is the original basis for the house. Let's say the house is worth $320K today. That would seem to give you $300K in capital gains.
However, your mother left her half of the house to your dad when she died in, let's say, 2006. She left her portion to your dad at its then current value. There has been very little inflation in home values in the last six years in most locations in this country. Say the house was worth $300K when your mom died in 2006. Her half of the house was worth $150K, so now your dad's basis is $150K (the value of your mom's half when left to him in 2006) plus $10K, which is his half of the original basis, or a total basis of $160K. If you sell it today for $320K his capital gain is now $160K ($320K selling price minus his total current basis of $160K) which would put you below the $250K capital gains exclusion limit.
Furthermore, you can add to the basis any capital improvements made to the house while your parents owned it. You cannot add normal maintenance expenses to the basis.
Also, any expenses associated with selling the house (realtor's commission, closing attorney's and other fees, etc.) reduce your capital gain.
One question for you: Did you or any of your siblings live with your dad for the two years prior to his going into the nursing home? If so, there may be a way to exclude the value of the house for the purpose of getting your dad on Medicaid.
A value step-up from 6 years ago is probably your best bet.
Assuming the house was worth $300K at the time of death, then a half-share would be stepped up to $150K, raising the basis to about $162K. That would eat up your taxable gain.
I would check the estate settlement. Everything would have had to be valued for the probate court, even if no estate tax was due.
When we went through this four years ago, we used a geriatric specialist. He was not an attorney, but he knew his stuff and was less expensive that an attorney.
We did have to use an attorney for some specialized services (e.g., transfer of the deed to me) but the geriatric specialist steered us to a firm that handled that, and the fee was quite reasonable.
As I recall it wasn't an exemption as such. It granted "empty nesters" a six month window to reinvest sale proceeds in a smaller house (build or buy) with out applying capital gains. I think it was a once in a lifetime deal to allow seniors to trade down to smaller digs.
Most State laws followed the Federal model. Wisconsin did not, if you bought or rebuilt in Wisconsin w/in six months you got a pass. If you bought or rebuilt out of state Wisconsin hit you up for the Capital Gains, and Federal rules did not. I know a guy who fought it all the way to the State Supreme Court and lost.
That was then, it may not be the case today, check with a tax preparer you trust before proceeding.
Regards & best of luck,
GtG
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