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Q&A: "What's the Best Way to Calculate Capital Gains on Sale of a Home with Life Benefit?"

Estate Matters Tax

Question and background: 

What's the best way to calculate sale ownership for a home with life benefit? And how do capital gains on the sale work? 

My sister and I are on the deed to my mother's home bought in 1995 for $95,000. Mom has a life benefit estate. We want to sell the home, and mom and I are going to buy another home in a different location and just put it in my name with her as a life benefit again. Mom is 88 yrs old. So what would mom's % of the sell of her home be? My sister and I have equal share. Would we have to pay capital gains on the whole amount we sell the home for or just the gains since mom bought the house in 1995?


The way I'm understanding the context of your question is that your mother bought a home for $95,000 in 1995, subsequently transferred title 50-50 to you and your sister, but she retained the right to live in the home for the rest of her life ("life estate"). 

Under such a scenario, your mother made a de facto gift of the home to you and your sister. At the value you mentioned, it's a virtual certainty that the gift amount exceeded the annual gift tax exclusion amount (it's $14,000 per donee for 2014 but was less in prior years). Now that doesn't mean your mother owes federal gift tax, but it is likely that she needed to file Form 709 (US Gift Tax return) to report using up part of her lifetime gift tax exemption. And if she had already used that up, then gift tax would be a concern.

When your mother transferred the house to you and your sister, the property's cost basis transferred over to you as well. That would be the original $95,000 plus any eligible additions or improvements to the property. 

If you and your sister sell the property, you will need to pay tax on any capital gains (gains above the $95,000 plus additions/improvements). And since the home is not the principal residence for you or your sister, there is no capital gains tax exemption available to you like there would be had your mother retained ownership and sold it. There is a $250,000 capital gains tax exemption for a single taxpayer when selling their principal residence (subject to certain restrictions).

Now, if your mother didn't transfer the property 50-50 to you and your sister--but rather just added you both to the title--then there's a three-way ownership split. And then your mother may still be eligible for capital gains tax exemption on her portion. I encourage you to discuss the full details with a CPA and obtain formal tax advice specific to your situation.

Hope that helps. All the best!