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Sale of a Residence After Death – Part I
Filed under: General, Residence Sale | Tags: appraisal, basis, community property, death, decedent, fair market value, joint tenancy, personal residence, rights of survivorship, sale, section 121, step-down, step-up, survivor, tenancy in common
Comments (7) Originally published in the Cedar Street Times
March 22, 2013
When a living individual sells a personal residence that results in a gain, many people are familiar with the rules which may allow an exclusion of the taxable gain of up to $250,000 ($500,000 if married filing joint) if the taxpayer lived in the property two out of the last five years as his or her primary residence. In the depressed real estate markets over the past few years, many people have also learned (sometimes to much dismay) that a loss on a personal residence is not deductible.
But what happens when a house is sold after someone passes away?
The first thing we need to do is determine the cost basis. At the date of death, the cost basis of the property changes to whatever the current fair market value (FMV) is (an appraisal is required – not a market analysis by a real estate agent). If the house is held in joint tenancy or tenancy in common, only the decedent’s share of the home gets a step up (or down) in basis to the current FMV, and the basis for the survivor’s original share does not change.
If, however, it is held as community property, the entire interest in the house gets a step in basis to the current FMV. If the property is held “with rights of survivorship” then the house passes immediately to the survivor which in turn inherits the new stepped up (or down) basis of the decedent to add to his or her own basis-in the case of joint tenancy or tenancy in common, or he or she takes the new FMV as the new basis if it was community property.
When the property is sold, the survivor reports the sales price less the new basis and selling expenses. If it was sold soon after death, the survivor often realizes a loss due to sales expenses if they got a full step-up in basis (albeit nondeductible if maintained as a personal residence). If the survivor realizes a gain, then, the survivor is eligible for the $250,000 exclusion assuming he or she meets all the normal rules. If it was a spouse that passed away, then the widow or widower would have two years from the date of death to sell the house and still be eligible for the $500,000 exclusion.
In two weeks we will discuss the more interesting scenarios that play out when the property is not held “with rights of survivorship” and the property goes to the individual’s estate or trust, such as is often the case at the death of a single individual or the death of the second spouse.
Remember, it is always best to seek competent advice as everybody’s tax situation is unique and there are more rules that could affect you than just those mentioned in this article.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Unmarried with Children – Head of Household
Filed under: General | Tags: biological child, Chief Counsel Memorandum, child tax credit, children, dependent, dependent benefits, dependent care expenses, dependent exemption, earned income credit, exemption, head of household, household, income limit, living together, principal residence, qualifying child, qualifying relative, SCA 1998-041, tie-breaker rules, unmarried, unmarried with children
Leave a comment Originally published in the Cedar Street Times
March 8, 2013
Article on Unmarried People Living Together with Children
I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate. With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!
When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married. Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.
Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children. This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.
For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.
A qualifying child is someone who must generally be under 19 (24 if full-time student). The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child. The child cannot provide over half of his or her own support, and the child cannot file a joint return.
Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption. (If they cannot decide, tie-breaker rules exist.) Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household. You cannot split up the benefits between parents.
If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent. Or maybe one or both have children from prior partners that live with them and could qualify them as well. (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B. This also qualifies B for head of household.)
Let us assume both unmarried people living together each have a qualifying child. Can they both claim head of household? If their households are maintained in separate dwellings, the answer is almost always yes. But what if they live under the same roof? Can you maintain separate households in the same house?
The answer to this depends on whether they are acting as a family unit or not. IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single. But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household. If you share a biological child as well, it will be nearly impossible for you to make this argument. But never say never!
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 