Joint tenancy, multiple owners, capital gains calculation

Unless I am missing something, 4 co-owners had basis of $100,000 each. When number 1 died and left his share, that share was worth $150,000 and added $50,000 to each of the 3 survivors, who now have 1/3 shares with basis of $150,000. 800/3 = $266,667 so the gain is only $116,667, far less than the $250,000 exclusion for.... Ok, here's what's missing, I was on a path to answer as if all lived there. What was co-owner 4's deal? Did he get rent out of this or just a share of appreciation? His gain cannot be excluded, as he did not reside there, and he may have been obligated to take depreciation over the 10 years.

Joe

The revised basis for the surviving owners is $450,000 ($400K + the $50K step up in basis to FMV for the decedent) or $150K each. The proceeds of $800K less $450K is a realized gain of $350K or $117K (rounded) each. It appears that owners 2 and 3 meet the qualifications for excluding gain on the sale of a main home and would not have any recognized gain. Owner 4 is not eligible for the exclusion. Assuming that owner 4 bought the original 1/4 interest as an investment, then there is a recognized long-term capital gain of $117K.

You have not identified the "costs" incurred. It is possible that some part of those costs could have been capitalized by owner 4 and owner's 4 gain would be less.

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Joe,

Thanks for the quick reply.

Co-owner 4 lived out of the area, shared equally in appreciation, tax deductions, maintenance, expenses, etc. No rent income.

Assuming the 3 remaining co-owners concurred and understood the gift tax implications (which would be essentially irrelevant for them), would it seem like a reasonable strategy to have co-owner 4 quitclaim to co-owners 2 and 3 to minimize the total capital gain via the $250,000 exemption and then have co-owners 2 and 3 gift equitable amounts to co-owner 4 such that all 3 netted equal amounts?

Luke

You're confusing income tax fraud with perfectly legitimate gifts. What you describe is fraud. I give you an interest in property. That's a gift. I hide my interest in property in your name to avoid paying tax on my taxable gain. That's fraud.

Phil,

Yeah, I thought it might be pushing the envelope. Looks like co-owner

Thanks for the help.

Luke

The taxes on the gain shouldn't be but $15k - $20k for owner 4. He'll still walk away with almost $100k. Is it really worth it to move AND tie-up the property/money for 2 years? Owner 4 should be aware that if housing prices decline not just he, but everyone, may end up with less net gain.