11 Jul What should we expect on taxes on this home sale or inheritance?

Q. My ex-husband — we are on friendly terms — is now 86 and our daughter has moved in with him to help care for him in his home in Monmouth County. He has owned this home, his primary residence, for decades. It will be very difficult to determine the cost basis because of years of upgrades and help from government money after Sandy. The current valuation on this small, waterfront home is close to $1 million. He wants to stay in the house, which my daughter will inherit when he passes away. If we need to sell the house to move him into assisted living, what kind of capital gains taxes are we talking about? He has little to no income other than Social Security. If he sold the home so he could be closer to me in Massachusetts, how would that work? And if we don’t sell the home until he passes away, what happens with taxes then?
— Planning ahead

A. It’s nice to hear you have a good relationship with your ex, and that you’re trying to help.

Establishing the basis of a home owned for a long period of time can be difficult.

Over long time periods, establishing detailed records on improvements is a challenge, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.

He said the IRS expects you to be able to calculate a basis to the best of your ability and it understands that estimations may be the best one can do.

“Remember that your ex-husband’s basis for tax purposes is the actual purchase price plus all improvements made to the property over the years,” Gallo said. “Once you have established a basis to the best of your ability, you would subtract that number from the net amount received at the time of sale.”

Remember the sale price is reduced by any cost of the sale such as real estate commissions, legal fees and any repairs or staging costs incurred during the sale process, he said.

This would result in your gain on sale.

If your ex was to sell the home, you would take the net gain on sale number arrived at in the calculation discussed above, Gallo said.

“The IRS then allows for a $250,000 primary home gain exclusion,” he said, and he offered this example.

Let’s say the home sold for $1 million and he paid out $75,000 in commissions and legal fees, the net amount received at sale would be $925,000. Then let’s assume that you have estimated his basis at $400,000, giving him a net gain on sale of $525,000.

The IRS rules state that the first $250,000 of gain is tax-free, leaving a taxable capital gain of $275,000 ($525,000 less $250,000).

Without knowing all your ex-husband’s financial information, the exact tax liability would be impossible to determine, Gallo said, but he estimates the tax liability for both federal and state taxes to be about 25% of the taxable capital gain or $68,750.

Gallo said if he sold the home and purchased another, it would not change the tax liability. He said the IRS regulations no longer provide for a tax deferral if you reinvest the proceeds in a new home within two years. Those rules changed years ago, he said.

Lastly, if your ex died while still owning the home and it passed to your daughter by virtue of his will, she would receive what is called a step-up in basis, Gallo said.

“This means that her cost basis upon inheriting the property would be whatever the fair market value of the home is on his date of death,” he said.

Therefore, assuming that value was $1 million on the day he died, that would become her cost basis moving forward, he said.

“If she sold the home at $1 million, she would pay no capital gain taxes,” Gallo said. “She would be responsible for taxes on any amount received from the sale in excess of her $1 million basis.”

Before you make any moves, consider working with a professional who can take a closer look at your ex’s finances to make sure everything is taken into account.

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This story was originally published on July 11, 2023.

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.