Tuesday, March 31, 2009

Good Intentions, Bad Tax Consequences

As we step in to take care of aging friends, parents and grandparents, we can make choices which seem like a good idea at the time, but turn out to be not so desirable when it comes time to sell.

I’ve gotten several questions lately about the tax consequences after selling a home that was either gifted or sold for a very low price prior to death, typically to a child of a sick or ailing relative.

The idea was that the owner was either too sick or unable to take care of their residence and a child stepped into getting control of the assets so they could make the financial decisions to care for the seller.

Since they didn’t want to pay the seller out of pocket, the property was gifted with a quit claim or grant deed or sold on paper for $1. or other low amount. No taxes were due, and now the responsible party was in control. Note: this doesn’t work for planning for state or federal aid unless done at least 5 years prior to need or request.

Then, once the parent or seller is taken care of or has passed on the property is sold for market value. It is at this time that the real consequences surface.

To make a long story short, the new seller now has a large tax bill with capital gains tax levied on the amount over cost basis for the sale. The cost basis is either the $1 paid or the previous owner’s cost basis if gifted. This can be a huge amount depending on value.

If the original owner had retained title, the house could have been sold and the personal exclusion for primary residence applied if they still satisfied the ownership and residence tests, or would have passed to the beneficiary at market value as of date of death.

The child could have gotten legal power of attorney and handled this for the original owner if incapacitated.

Before making any major decisions, be sure to meet with a good attorney who will explain all the pros and cons.

Paula Straub
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