How to calculate the "Cost or other basis" for tax filing purposes ?

The variables:

During 2020 my wife's Mother added her two children (daugher and son) as co-owners of her home (primary residence), so that all three of them were co-owners of the property.

They sold the house and closed Oct. 2021 with each person receiving a check of equal amounts from the settlement company for 1/3 of the total proceeds of the sale.

Wife received tax form as follows:

"Substitute FORM 1099-S, proceeds from real estate transactions, for the tax year: 2021"

Box 1 Date of Closing: xx/xx/2021
Box 2 gross proceeds: $xx thous

So now I'm filling out this transaction into TurboTax as follows:

Description: Second Home
Date Sold: xx/xx/2021
Date Acquired: Inherited
Sale Proceeds: $xx thous
Cost or other basis: ???

I've read about cost basis regarding real estate gifting, inheritance etc. but am coming up short:

Q1) since her mother is still alive, should the Date Acquired be "Inherited", or some date such as the date she was added as co-owner ?

Q2) how to calculate the amount to fill in the "Cost or other basis" amount ?

I've had lots of accounting and finance in undergrad and MBA school, but I can't trust myself for this when it comes to taxes (went into IT)

Any takers with answers greatly appreciated...

In 2020 2/3 of the home was gifted. Hopefully you had the home appraised at that time.Your wife's mother owes gift tax on the ownership transfer. Your basis is the 2020 value plus any costs of fixing up the home for sale & all selling costs(per Closing Disclosure). Who's SS number & name is on the 1099-S. If it is only your wife's name, then you owe capital gains tax (ST or LT depending on dates) & hopefully you can be reimbursed by the other owners. If the sale is not reported correctly you will get an IRS nastygram in about 2 years. This is not a Turbotax situation, extend your tax return & go see a CPA.

Lot going on here. All three people need to work tax professionals.

This should have been worked out and detailed before the sale.

Lot of this depends on values and numbers.

1st. Not inherited. Person needs to be dead to pass on something to an heir.

It could be a gift, if there is documentation at the time of gift. Size determines what if any gift tax returns. This will determine what if any basis transfers.

The form you are seeing is only the gross proceeds. As others have said need costs of sales and allocate those out

Lot more questions than answers until details are given.

This transaction is way more complicated for forum discussion. And three people are affected by it.

quote:

In 2020 2/3 of the home was gifted. Hopefully you had the home appraised at that time.Your wife's mother owes gift tax on the ownership transfer. Your basis is the 2020 value plus any costs of fixing up the home for sale & all selling costs(per Closing Disclosure). Who's SS number & name is on the 1099-S. If it is only your wife's name, then you owe capital gains tax (ST or LT depending on dates) & hopefully you can be reimbursed by the other owners. If the sale is not reported correctly you will get an IRS nastygram in about 2 years. This is not a Turbotax situation, extend your tax return & go see a CPA.

^^^^^^^^^^^^^^^^^^
SLight thread drift. Dr. Goodheart was on during the last week. You should page him with a separate thread so he can respond to your heart question.

I am not qualified to answer your question.

I'm curious, however, how and why this was set up and executed in the first place?

I do believe I'd be on that attorneys doorstep tomorrow morning with questions and demanding answers.

Assuming, of course, an attorney set this up, or maybe the title closing company just did what was asked.

.

quote:

Originally posted by OKCGene:
I am not qualified to answer your question.

I'm curious, however, how and why this was set up and executed in the first place?

I do believe I'd be on that attorneys doorstep tomorrow morning with questions and demanding answers.

Assuming, of course, an attorney set this up, or maybe the title closing company just did what was asked.

.

Not an attorney question, a CPA question.
I agree with others that say this should have been better thought a year or more ago.
They need to be on this tomorrow so they can pay any possible estimated taxes by the 18th (over-payments get credited or refunded) and probably file for an extension to figure it out.
Hopefully nobody spent all the proceeds until they know what they netted.

quote:

Originally posted by Anush:
In 2020 2/3 of the home was gifted. Hopefully you had the home appraised at that time.Your wife's mother owes gift tax on the ownership transfer. Your basis is the 2020 value plus any costs of fixing up the home for sale & all selling costs(per Closing Disclosure). Who's SS number & name is on the 1099-S. If it is only your wife's name, then you owe capital gains tax (ST or LT depending on dates) & hopefully you can be reimbursed by the other owners. If the sale is not reported correctly you will get an IRS nastygram in about 2 years. This is not a Turbotax situation, extend your tax return & go see a CPA.

Hi Anush. Here's the answers:

"Your basis is the 2020 value plus any costs of fixing up the home for sale & all selling costs"

Each person received 1/3 of the proceeds, $50k each. So is my wife's Basis the market value plus selling costs for the whole house, or just 1/3 of that figure ?

"Who's SS number & name is on the 1099-S"

My wife's SSN is on the 1099-S issued by the Settlement company.

1. The date acquired for the son, daughter, and mother is the date the mother bought the house. The date of the gift is irrelevant when determining long term or short term gains.

2. Similarly, each person’s cost basis will be 1/3 of what the mother paid for the house plus 1/3 of the cost of any improvements along the way.

Unless the mother has made more than $11.7 million in lifetime gifts, it’s not likely the mother would owe any gift taxes. Did the mother file a form 709 for the year the gift was made?

If the home was the mother’s primary residence, she can excluded up to $250,000 of gain. The son and daughter cannot unless it was their primary residence as well. If not, the son and daughter are paying tax that didn’t need to happen.

Wait, the whole selling price shows up under your wife’s SS number? That’ll be fun. I’m not sure how to report that properly.

quote:

Originally posted by trapper189:
1. The date acquired for the son, daughter, and mother is the date the mother bought the house. The date of the gift is irrelevant when determining long term or short term gains.

2. Similarly, each person’s cost basis will be 1/3 of what the mother paid for the house plus 1/3 of the cost of any improvements along the way.

Unless the mother has made more than $11.7 million in lifetime gifts, it’s not likely the mother would owe any gift taxes. Did the mother file a form 709 for the year the gift was made?

If the home was the mother’s primary residence, she can excluded up to $250,000 of gain. The son and daughter cannot unless it was their primary residence as well. If not, the son and daughter are paying tax that didn’t need to happen.

Wait, the whole selling price shows up under your wife’s SS number? That’ll be fun. I’m not sure how to report that properly.

Negative, the amount reported to the IRS in my wife's name was only 1/3 of the sale price of the home, there were three owners: mother, son, and daughter.

quote:

Unless the mother has made more than $11.7 million in lifetime gifts, it’s not likely the mother would owe any gift taxes. Did the mother file a form 709 for the year the gift was made?

That is incorrect. The $11.7 million is the combined lifetime gift & estate tax exemption, not the annual gift tax exemption. The gift tax exemption was $15000 in 2020 & 2021.
I strongly suggest you go to a CPA. Also send me an email & I can discuss with you. My email is in my profile.

quote:

So is my wife's Basis the market value plus selling costs for the whole house, or just 1/3 of that figure ?

Your wide's basis is 1/3 of the market value at the time she was gifted 1/3 of the home + 1/3 fixing up & 1/3 selling costs. It is great that the 1099-S is only 1/3 of the selling price. I have seen that screwed up before. For a client I am currently fighting an unreported 1099-S of $450000. IRS wants taxes & penalty of $225000 on the $450000.

Good lord, that's ridiculous, that kind of penalty. It's incredible the IRS is so evil to impart that kind of "fine". No wonder the IRS is so hated, not so much for the taxes themselves, but the abuse while making things right.

But Anush, your simple explanation was what I was looking for; a + b + c = basis. You couldn't have made it simpler. I THINK I this may be enough information to get by, doing it correctly enough to make the IRS happy. In any case I filed an IRS Extension electronically today since I need more information about what is included in selling costs, since I see many line items listed in the Title Company's statement.

Thanks a bunch

quote:

Originally posted by Anush:

quote:

Unless the mother has made more than $11.7 million in lifetime gifts, it’s not likely the mother would owe any gift taxes. Did the mother file a form 709 for the year the gift was made?

That is incorrect. The $11.7 million is the combined lifetime gift & estate tax exemption, not the annual gift tax exemption. The gift tax exemption was $15000 in 2020 & 2021.
I strongly suggest you go to a CPA. Also send me an email & I can discuss with you. My email is in my profile.

I’m right. The only way gift taxes would be owed is if she has used up her Unified Credit which currently equates to $11.7 million in gifts. Since the house was sold for $150,000, I’m not really going out on a limb saying no gift taxes will likely be owed. The annual exclusion amount is used to figure out if you need to file a gift tax return. If you give more than $15,000 to one person, you need to file a Form 709.

quote:

Originally posted by Anush:

quote:

So is my wife's Basis the market value plus selling costs for the whole house, or just 1/3 of that figure ?

Your wide's basis is 1/3 of the market value at the time she was gifted 1/3 of the home + 1/3 fixing up & 1/3 selling costs. It is great that the 1099-S is only 1/3 of the selling price. I have seen that screwed up before. For a client I am currently fighting an unreported 1099-S of $450000. IRS wants taxes & penalty of $225000 on the $450000.

Again, I’m right. If the fair market value of the gift at the time of the gift exceeds the basis of the person who is giving the gift, the the receiver’s basis is the same as the donor’s. You maybe confusing the step up in basis for estate taxes applied to the decedent’s assets at the time of death. There is no step up on basis on gifts.

Trapper189, retired CPA

quote:

Originally posted by wrightd:

Negative, the amount reported to the IRS in my wife's name was only 1/3 of the sale price of the home, there were three owners: mother, son, and daughter.

You’re golden. Everything I said is correct in your case.

I just thought of one issue. I assumed the mother is single, but I didn’t take into account a possible step up in basis if she was married and the house was jointly owed with the husband when the husband passed. I’d consult a CPA in your state in that case. If the market value exceeded the basis at the time of death, there most likely would be a step up in basis. On what portion of the house would depend on who owned the house and if there were any trusts involved. That exceeds what I’m willing to do off the top of my head.

I’d file for the extension.

Yea I did file an extension. I'd don't want any letters from the IRS now, two years from now, or ever. I've received them before and they're a real headache for a non-accounting duffer like me.

quote:

Originally posted by trapper189:

quote:

Originally posted by wrightd:

Negative, the amount reported to the IRS in my wife's name was only 1/3 of the sale price of the home, there were three owners: mother, son, and daughter.

You’re golden. Everything I said is correct in your case.

I just thought of one issue. I assumed the mother is single, but I didn’t take into account a possible step up in basis if she was married and the house was jointly owed with the husband when the husband passed. I’d consult a CPA in your state in that case. If the market value exceeded the basis at the time of death, there most likely would be a step up in basis. On what portion of the house would depend on who owned the house and if there were any trusts involved. That exceeds what I’m willing to do off the top of my head.

I’d file for the extension.

Her husband passed quite some time ago, she was the only owner before she gifted each 1/3 to her two children. Funny thing though, is each recipient is holding that money to take care of mom. Seems a hard way to go, pay taxes for money they are supporting their mother with.

Having been involved in one of these, I can tell you that you need professional advice. Either a qualified CPA or an attorney specializing in taxes, or perhaps both.

It would have been ideal if these folks had been involved in structuring the gift, as taxes could have been minimized to the greatest extent possible at the time of gift.

Regardless, run, don’t walk, to get professional advice on how best to handle the situation as it is now.

As this discussion shows, and I said earlier, go to a qualified tax professional in your area. There is too much money and room for error here to rely on your internet friends . No matter hw well intentioned we are.