sold inherited house

If his parents retained a life estate in the house then there's a good chance the son's basis is the FMV on the date the last parent died. If the son got an unrestricted gift in 1990 then his basis is his parent's basis + $1 + the costs of any capital improvements he paid for.

Sorry to pour cold water on your parade, but the situation (as often happens in DIY estate planning) is definitely NOT to your advantage.

His basis is the parent's basis since this was a gift.

Do-it-yourself estate planning strikes again. Had the son actually inherited the house, his basis would be the FMV on the parent's date of death. Phil Marti Clarksburg, MD

"SMF" wrote

It looks like parents gifted house to son. Therefore the basis is the parents basis + $1 he paid. There would be, of course, differing answers if more information about the house, who lived there for the past 16 years, was it rented, etc. were known.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Neither. Your basis is $1, and if you lived there in 2 of the last five years you can exempt $250K worth of gain, $500K if you are married. The transfer of homes in this manner is one of the worst ways to lose the step up in basis that would usually happen when you inherit a house the regular way. Presumably, the house was worth over $20K in 1990, they should have filled out gift tax forms for the IRS, otherwise the attorney who helped with that transfer missed an important item. JOE JoeTaxpayer.com

This is neither a bona fide sale nor an inheritance (i.e., a testamentary transfer) - assuming that Parent lived a while longer after having transferred the house to Son. What this really looks like (and what it is) is a gift to Son by Parent on the date of the transfer in 1990, in an amount equal to the then FMV of the house, less $1. That means that a gift tax return should have been filed; if not, you've got potential gift tax liability sitting out there. As to basis, because this is in substance a gift, Son would have taken a transferred basis in the house equal to Parent's basis in the house at the time of the transfer in

1990, increased by $1 to reflect Son's investment of $1 in the house. As such, the FMV of the house either on the date of transfer in 1990, or on the date of Parent's death (presumably at a later date) is irrelevant to the issue of Son's basis.

His basis would be whatever the parent's basis was.

Stu

That was a gift.

On a gift, the son has the same basis as his parents did.

Seth

ed

or the parent's basis, if higher.

Seth

I don't think so; I think it's the greater of parent's basis or $1. Consider a $300,000 house (parent's basis $200,000) sold as a gift to the child for $150,000. The child wouldn't get a basis of $350,000. Seth

Raises an interesting question. Party with the gift tax liability is the parents. What if they did not file gift return, are deceased and their estates closed? Also, I assume that if son had qualified the property as his principal residence he would get the appropriate residential exclusion upon sale.

-HW "Skip" Weldon Columbia, SC

What if the parent lived in the house until they passed in

2005? Hopefully that changes things....tax wise that is.. Thanks

If the parents didn't file a proper gift return, I don't see that the son could use their basis. If he bought a house from a stranger at a bargain price, his basis is the (bargain) sale price. I understand that dealing with a relative has its own set of tax concerns and warnings. So where is the gift aspect accounted for? JOE

The child's basis is the amount paid + the amount of the gift. Using your $300,000 house as an example, the child's basis would be $150,000 (cash paid) + $150,000 (the amount of the gift).

The IRS can get it from the recipient.

If he lived there for two years out of the five before sale, I agree with you. Stu

It's a gift even if a gift tax return was not filed. The effect is that the statute of limitations never runs on the return, and the value of the property will be pulled back into the parents' estate, though that is unlikely to result in a stepped up basis. I don't remember off the top of my head if the value included in the estate will be the value on the date of the gift, or the date of death. Stu

As someone else mentioned, it would come under §2036, which says that the parents are treated as the owners when they die, it is included in their taxable estate for estate tax purposes, and the basis is stepped up to the value on the date of death. Stu

Why not?

If he bought from a stranger, the price he paid is Fair Market Value by definition. Seth