What taxes will my mom owe when she sells her house?

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Q. My mom is widowed, with my dad having been deceased for five years. She is selling her home, worth $1.1 million, and moving in with me in a new, bigger house, which I will own by myself. She wants to gift me $150,000 toward the new house. What will my mom’s taxes be when she sells and at what tax rate?
— Trying to help

A. There are a variety of factors that come into play here.

The tax, if any, will depend on her specifics. But here’s generally what she needs to know.

In order to get any beneficial tax treatment, your mom must have been living in the home for two of the past five years, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

If that’s the case, the first $250,000 of gain is tax exempt, assuming she’s single, he said. For those married filing jointly, the first $500,000 of gain would be exempt.

To determine if there is a taxable gain, you have to calculate the cost basis of the home.

“Assuming that she and your dad bought in jointly with rights of survivorship, her basis starts with 50% of the purchase price of the house plus 50% of the closing costs on the purchase,” Karu said.

Next, add 50% of all major improvements, such as a new kitchen or bathroom, he said, and then you add 50% of the value of the house as of your father’s date of death.

The total becomes your cost basis, he said.

“The difference between the selling price of the house less the closing costs of the sale, less the basis that was calculated, is her profit on the sale,” Karu said. “If that amount is $250,000 or less, the tax on the transaction is zero.”

Any gain over $250,000 will be taxed at her applicable capital gains tax rate plus state tax at her applicable rate, he said.

The next part of your question deals with the gift of $150,000.

“Gifts may be taxable, but, in all likelihood, this will not be,” he said. “Annual gifts of $16,000 or less to any number of people is tax exempt. After that, a gift tax return must be filed and, to avoid the tax, the donor would use part of his/her lifetime exemption.”

If you’re not sure, work with a qualified tax professional who can review the specifics of your mom’s home sale.

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This story was originally published on April 28, 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.