Investment, Inheritance or?

Today TaxMama hears from Tony with this story, “My friend’s mother recently sold her father’s home (he is elderly). He gave her power of attorney to sign off on everything, and she kept the proceeds of the sale.* Would this house be considered inherited property, invested property, or anything else for my friend’s mother?”

Dear Tony

How very nice of you to ask on behalf of your friend.
What is the money to your friend’s mother?
It’s not an inheritance – Dad is still alive. Someone has to die for you to inherit.
It’s not her investment – she wasn’t on title to the house. Nor would she want it to be an investment. As an investment, no one would be entitled to use the $250,000 per person exclusion for the sale of a personal residence. So, it’s a good thing dad gave her the money after he sold the house he lived in.
It IS a gift. (* Only if she kept the proceeds with Dad’s permission, of course!)
And it would be wise to prepare a Gift Tax return on Dad’s behalf, Form 709, showing the amount of the gift to his daughter. There won’t be any taxes on it unless she received over $1.5 million – if the house was sold in 2005; or $2 million – if the house was sold in 2006. http://www.irs.gov/pub/irs-pdf/f709.pdf
Having a copy of the Gift Tax return in her hot little hands will protect her if she’s ever audited and IRS sees that she suddenly made this huge deposit without reporting the income.

And yes, of course, please, have your friend’s family engage the services of a competent tax professional so this is all done right. There’s too much money at stake to blow it.

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

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