Q: I hope you can answer this question. I have gotten two different answers from other accountants. My mother, at age 95, finally decided to move in with my sister in October 2020. She was nearly blind and had just been diagnosed with cancer, but she was of very sound mind and had all of her mental faculties. Her home was in a small town in Tennessee and she transferred it by quitclaim deed to me and my sister (her only two offspring).Mother died in February 2021.My parents purchased the house in 1958 and they continuously occupied it until Mother vacated it last October (Daddy died in 2009). The best offer my sister got for the property was $39,000. Each of us received about $19,350.00 from the sale.I have had one accountant tell me that I owe no tax on the income since it is the result of an inheritance. Another accountant has said that I will owe income taxes on the proceeds of the sale since my sister and I owned the property because of a gift. Please advise the IRS position on this issue.
A: You have an interesting problem. If you acquired the property by inheritance, your tax basis would be the fair market value (FMV) at the date of your mother’s death. If acquired by gift the basis is the same as your mother’s basis.
The simple answer is to say that the quitclaim deed transfer was a gift made in October 2020. This simple answer is probably also the right answer.
The problem with this answer is that I doubt that you and your sister have a reasonable idea what your mother’s basis in the house was in October. You would need to know three things to discern the basis.
First, what did your parents pay for the house in 1958? Second, what capital improvements did they make from 1958 to 2020? Third, what was the house worth when your father passed away in 2009?
I will make up some numbers just to illustrate why each of these questions is relevant. Let’s say that Mom and Dad purchased the house for $8,000.
Over the 62 years of ownership, they put $10,000 in improvements into the house with $4,000 coming after your dad’s death. The house was worth $26,000 when your dad passed away.
With all those facts, it is easy to determine the basis. It starts at $8,000, the purchase cost. With $6,000 of improvements before your dad’s death, the basis was $14,000 in 2009.
Your mom inherited half of the house from your dad (Tennessee is a separate property state). Her tax basis then became $20,000. This is one-half of the FMV at Dad’s death ($13,000) plus one-half of the 2009 basis ($7,000).
With $4,000 of post-2009 improvements, the basis was $24,000 when your mom made the quitclaim transfer. With these made up numbers, you and your sister each have a gain of $19,350 minus $12,000, or $7,350.
If your mother waited to transfer the house through her estate, your basis would have been FMV at her death, which would have eliminated any gain. If she continued to live in the home after the gift there is an argument that the house is still in her estate because she retained possession.
You may be able to piece together some of the answer from family records or even family stories.
From a basic search, Tennessee seems to have a simple process for quitclaim deeds. It appears only the grantor need sign.
If there was any defect or delay in completing the quitclaim process your mother arguably had a right to revoke the transfer. This right to revoke would have existed until the transfer process was complete. Since the deed transfer was within three years of death there is a tax rule that would include the property in mom’s gross estate if she could have revoked the transfer but surrendered that right within 3 years of death.
Affirmative use of the 3-year rule for your benefit is fairly aggressive. It also turns on Tennessee law, which I cannot help you with, to ascertain any period where the transfer may have been revocable.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.