09 Feb How will mom’s profit from a home sale be taxed?

Q. My mom, 97, recently sold her home. She’s been in the house 65 years and dad died in 2008. How will she be taxed? Also, this is her only money, and although she lives with me now, she may need more care down the road. Where should we keep her money in the case we have to access it for assisted living?
— Trying to help

A. We’re glad to hear you’re helping out your mom.

How the money will be taxed will depend on several factors.

Assuming that your parents’ home was located in New Jersey, it is likely that at that time of your dad’s passing, they owned the house as “Joint Tenants with Rights of Survivorship,” said Kelly Henning, a certified financial planner with Modera Wealth Management in Westwood.

As such, one-half of the property’s cost was “stepped up” when your dad passed away, she said.

“For example, in 1956, your parents purchased the home for $25,000. When your dad passed away in 2008, let’s assume the value of the home was $300,000,” Henning said. “Your dad’s half of the home was `stepped up’ from $12,500, or half of the original cost basis, to $150,000.”

When your mom sold the property recently, she had a $250,000 exclusion on gains on the property, Henning said, noting that the exclusion amount is $500,000 for a married couple filing jointly and for a widow/widower when the property is sold within two years of the spouse’s death.

So let’s assume she sold the property for $400,000.

“Her cost basis was $162,500 — or $12,500 for her portion and $150,000 from your dad’s stepped up portion,” Henning said. “If we subtract her cost basis of $162,500 from the sales price of $400,000, minus selling expenses, she has a gain of $237,500, which is below the $250,000 limit of the exclusion so no taxes are owed.”

Keep in mind that capital improvements done to the home since the original purchase can be added to the original cost basis of the property, Henning said. She recommends your mom provide her accountant with a list of these updates to see which qualify as increases to her cost basis.

Henning said if there is a taxable gain on the sale, your mom would be taxed her long-term capital gain rate for federal taxes as well as at her ordinary income rate for her New Jersey taxes.

In terms of where it’s best to keep her profits, you’ll probably want a safe investment and not risk the money in the stock market. Also keep in mind that she will need to spend down her assets before she would qualify for Medicaid, so consider working with an elder law attorney who can assess her entire situation.

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This story was originally published on Feb. 9, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.