Harry Gross: Their gain (on house sale) is their loss (of sorts)
Dear Harry: In December 1996, my mother signed over the title to her house equally to my sister and me and our spouses. We all agreed that she had the right to live in her house as if she was still the owner for as long as she wished. She would pay for the taxes, insurance, maintenance, etc. She would live in the house as she had since she and dad bought it back in 1972. They paid a whopping $12,000 for it. Last November, she had a hip replacement and went to live with my sister during her recovery. She later decided to continue living there. We all agreed to sell the house, which happened recently. We got $89,000 net from the sale, which my sister and I split as my mother had wanted us to do. Since the house is not our residence, there will be an income-tax due on the sale. What is our basis? Is it the value on the date of the gift, her cost, or the value when sold? We know there's there's no rush to get the answer, but we'd like to know before we prepare our returns.
What Harry says: The basis of property received by gift depends on whether there is a gain or loss. If there is a loss, the basis is the lesser of cost to the donor or market value on the date of the sale. This prevents the "advantage" of giving of loss property to family or friends who are in a higher tax bracket. The basis for gain is always the cost to the donor. It appears that you and your sister each have a hefty capital gain of $38,500 to report (one half of $89,000 minus $12,000). If your mother had retained the title and made you a gift of the proceeds, the taxable income would have been zero since it was her residence. The basis of inherited property is the market value at the date of death. These are among the major reasons I will almost always recommend that parents should not make a gift of their homes to children. Let them inherit it.
Write Harry Gross c/o the Daily News, 400 N. Broad St., Philadelphia, PA 19130. Harry urges all his readers to give blood - contact the American Red Cross at 800-GIVE LIFE.
