What are the tax implications of a sibling buyout…

Forum|Forum|2 years ago
July 20, 2023
1 reply
0 views

Hello - Three siblings inherit the family home in Jan 2021: 1/3 Joe, 1/3 Peter and 1/3 Mary. Now, Joe would like to gift his 1/3 share to Mary. Peter would like to gift 1/3 of his 1/3 share to Mary. What is the best way to account for this and what are the tax implications?

rjs

Employee

Is this a homework exercise or a test question? This TurboTax community is not a homework help site. We're here to help people handle their own taxes. Where does MeeshkaDiane fit into the scenario that you described? What is your relationship to Joe, Peter, and Mary?

A gift is not a "buyout." In your scenario, no one is buying anything. Or did you omit some crucial details? Joe and Peter (not Mary) will have to file gift tax returns if the value of their gifted shares is more than $17,000 (for 2023).

To determine the effect on Mary's basis you need to know whether the estate used an alternate valuation date, the fair market value of the home on either the date of death or the alternate valuation date, and the fair market value on the date of each gift. You need dollar values, not just fractions of ownership.

There is no capital gain until someone sells something.

MeeshkaDianeAuthor

Hello - Okay, thank you. I am Mary. Trying to keep this simple. Joe and Peter are brothers. One brother is gifting his full share. I would be buying out the other brother, but only for a portion of his 1/3 share. Say the house is worth $450k. Instead of me buying him out for 1/3 x 450 = 150, he would only charge me 100. I think he would have to report a capital gains loss, offset by any capital gain on the FMV of the house that arose between the date of death (Jan 2021) and the date of sale (Aug 2023)?

The next big concern is my basis. The basis would be based on the FMV of the home at today's date since the date of death has passed. How would this be calculated? I may not live in it and sell it next summer, which may trigger a large capital gain which would not make sense.

Carl11_2

Employee

There are other alternate valuation methods out there that may or may not increase your cost basis and help you. I'm not all that privy to the inner workings of these other methods, as they can get rather complicated and require a complex paper trail to substantiate if audited on it. Therefore, I'm keeping it simple.

Typically with inherited property, the cost basis is the FMV of the property on the date the previous owner passed. If audited on that valuation, some kind of documentation may need to be provided in order to support said valuation.

If each beneficiary gets 1/3 of the property then the cost basis for each of them is 1/3 of the previously established FMV.

If one beneficiary gifts their share to another beneficiary then that is a gift. If the FMV of their share is more than $17,000 then the giver (not the recipient) is required to file IRS Form 709-Gift Tax Return with the IRS. If the value of the gift is less than $11.5M (and I'm sure it is) then no taxes will be paid. But like I stated already, if the value is more than $17K the IRS reporting on form 709 by the giver is still required.

Say the house is worth $450k. Instead of me buying him out for 1/3 x 450 = 150, he would only charge me 100.

Using your numbers, they would still be gifting you $50K. Since that's more than $17K they would be required to file the form 709 with the IRS for the $50K they are gifting.

Assuming the most simplistic valuation method is used, your cost basis would be (using your numbers):

$150K for the portion you inherited plus

$150K for the portion gifted to you plus

$100K for the portion you purchased plus

$50K for the portion gifted to you.

Total would be $450K