Generous Family

Today TaxMama hears from Rick in California who says “I’m selling a home in which I’m a 50% owner. This home was given to me by my living grandmother in 2001; which was given to her in 1994 by her living mother. The house will sell for $138,000.00 and I will be getting half of that ($69,000.00). How do I determine how much capital gains taxes I need to pay on the $69,000.00?

Hi Rick,

It’s very nice of your family to be so generous to family members – sharing assets while folks are alive. But, tax-wise, it’s pretty dumb.

If your living grandmother is still living in that house, and she had not given you half the value – she could sell the whole house without paying a dime in taxes. (She can avoid tax on up to $250,000 of profit if it’s her home.) Since you own half of it, her gain will be tax-free.

The problem arises with your gain.

1) You need to do some digging to find the original purchase price of the home, way back in history. See if you can get proof of the price.

2) Add in the cost of any improvements (pools, additional rooms, etc.).

3) Deduct any casualty losses that were used (earthquakes, floods, fires, etc.), if any.

This kind of digging will give you the basis (or tax cost) of the home. You get to reduce your profit by half the basis. (Note: I am assuming it was never rental property, right?)

So figuring your great-grandmother bought the house about 30 years ago, her cost was probably about $30,000. That means your taxable profit will be around $54,000.

Since long-term capital gains are limited to 15% for IRS, and California’s top tax rate in 2007 was 9.3% – the least you pay will be around $13,000.

Expect California’s tax rate to increase for 2008.

Naturally, if your basis is lower, your taxes are higher. Use 25% as your total tax rate just to be safe.

One or two hours with a good tax pro could have saved you over ten grand.

And remember, you can find answers to all kinds of questions about family gifts and other tax issues, free. Where? Where else? At TaxMama.com

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