Two Questions - Re: Home Sales

Forum|Forum|1 year ago
January 18, 2025
1 reply
0 views

Q1: I am in the process of selling my father's home who is a widower. The home is in California and his wife died ~11 years ago. My understanding from his lawyer is that as CA is community property state he will get the step up for the exemption for the home. I wanted to a) verify that this is the case and b) on his taxes (which I'll do for him in TT) do I simply apply the $500K exemption? The home is worth ~$800K and there is a $400K reverse mortgage. After fees and other costs I expect the proceeds to be ~$335K so I do not see a capital gains event but wanted to check with the experts.

Q2: My wife inherited a home along with her two siblings. The home is in CA, paid for and worth ~$1.2M. The family will sell the home soon and my understanding is that there will be no inheritance tax event as the proceeds will be well below the Federal $12.92M exemption and CA has no inheritance tax. a) please verify this and b) where in TT do I account for the inheritance (split three ways amongst the siblings) for the home?

AmeliesUncle

@freddytax wrote:
Q1: The home is in California and his wife died ~11 years ago. My understanding from his lawyer is that as CA is community property state he will get the step up

for the exemption for the home. I wanted to a) verify that this is the case and b) on his taxes (which I'll do for him in TT) do I simply apply the $500K exemption?

Q2: My wife inherited a home along with her two siblings. The home is in CA, paid for and worth ~$1.2M. The family will sell the home soon and my understanding is that there will be no inheritance tax event as the proceeds will be well below the Federal $12.92M exemption and CA has no inheritance tax. a) please verify this and b) where in TT do I account for the inheritance (split three ways amongst the siblings) for the home?

Q1: The "step up" means the 'cost' is stepped up. When you report the sale, you enter the cost and the sales price, and the difference is the profit. In this case, the 'cost' is the Fair Market Value on his wife's Date of Death.

If he meets the requirements of the Principal Residence exclusion, he can 'exclude' up to $250,000 of the profit (after factoring in the adjusted stepped-up cost). If he is single, it is a $250,000 exclusion (not $500,000).

Q2: Did the house go directly to your wife and her siblings, such as a Transfer on Death deed? Or are they just beneficiaries of the will (in which case the property belongs to the 'estate' right now)?

freddytaxAuthor

Thank you! So I'm thinking the math for Q1 looks something like:

Sales Price = $800K

Cost Basis at time of my mother's death = $600K + any improvements and repairs

Less: Realtor and other fees = ~$55K

Less: $250K exemption

$800K - $600K - $55K - $250K = <$105K> so no capital gains

Sound right?

As for your question for Q2 I need to find that out!

AmeliesUncle

@freddytax wrote:

$800K - $600K - $55K - $250K = <$105K> so no capital gains
Sound right?

As for your question for Q2 I need to find that out!

Yes.

If the estate owns the house, the estate will file Form 1041 to report all income of the estate, including the sale of the home. Similar to Q-1, there will be a step-up in Basis. After factoring in sales expenses, there likely will be a loss. The estate's 1041 will give a K-1 to all beneficiaries, then that K-1 will be entered on your personal tax return to report any gain or loss (there could be other items of gain or less in the estate).

If the estate's total assets are worth less than $13-million-ish, there will not be an "estate tax" on the assets.

I recommend that the executor of the estate go to a tax professional to have any required estate returns filed (such as the Form 1041 to report income or losses, including the sale of the house).