I’ve been reading through all the insightful and helpful information all throughout the message boards. The participants are so on the point and humorous at times.
My first question, and I’m sure there will be many more to come: is regarding income on a property that my wife and I sold in February 2006. The property was deeded to us in June 2005 from my mother, whose intention was for it to be willed to my wife and I. She died in July 2005 and eventually we sold it for $370k with a net of about $200k after paying the existing mortgage. The property was in New Jersey, and I reside in North Carolina. In the scheme of things I’ve been told about how I’m going to be leveled by taxes. Are there any quick fix remedies to guard our profit, or will it be treated as inherited gains with no taxes. Sorry to be so long !!
If you inherited the property, you receive the basis (cost) as of the date of death (or, 6 months later). Upon selling it a few months later you would have, in effect, little or no gain, and no tax.
However, if she sold or gifted it to you prior to death, then your taxable gain will be close to $200k because your “cost” will be close to zero plus the amount of the debt assumed.
for example, I recently had a client who’s father had sold him some property for $10 prior to death. when he sold it 3 years later, he realized gain on the full sales price, since his “cost” was only $10. He ended up paying $15,000 in cap gains tax. hardly a bargain sale.
Had he waited and inherited the property, his basis (cost) would have been the market value at the date of death and he would have realized no gain, even though he received cash at sale.
So, the question of how you received the property is VERY important here. Was the Deed in June 2005 recorded? If not and the property was never transferred into your name as owners and transferred to you through the will, then you may have gotten lucky. Otherwise, if you were already the owner of record when she died, you may be responsible for cap gains tax on the entire 200k. To add insult to injury, this will probably be short term gains at the highest tax rate.
Not to beat you up, but $1,000 of estate planning would have been a good investment here.
Tell us more about how the property transferred to you.
On the other hand, if the property was given (gifted) to you – you said your mother deeded you the property – then her adjusted cost basis becomes your cost basis for tax purposes. However, your mother’s holding period tacks on to your holding period, so long term capital gains may apply if the combined holding period is greater than one year.