Dear Len & Rosie,
Mother passed away two months ago. We just found the deed to the house. All five names were on the deed - mom and the four kids. When we sell the house do we have to pay capitol gains tax? If so how much?
Will you have to pay capital gains tax? Probably not. The IRS recognizes "grantor retained interests." Even though you and the other three children were named on the deed, your mother retained full use and enjoyment of the property until her death and didn't even tell her children that they were added to the title to the property. That causes the entire property to be subject to federal estate tax. Even though no tax may be due because your mother wasn't worth more than $3,500,000, the estate tax exposure triggers a cost basis adjustment in the property.
The cost basis should now be the value of the property on your mother's date of death. That's the amount of money you can sell the home for without having to pay tax. You and your siblings will have to pay 15% federal capital gains tax and California income tax on what you get above that amount. Please note that this income tax would be paid in California even for siblings who live in other states. An out-of-state sibling would have to file a California Non-Resident Income Tax Return, form 540-NR.
But we're jumping the gun here. You can't sell the home until your mother's name is removed from the deed. Examine the deed. Does it name all five of you as "joint tenants" or "joint tenants with right of survivorship?" If so, then the home was held in joint tenancy and will not be subject to probate. To remove your mother's name from the deed to the home, you will have to record an affidavit of death of joint tenant together with your mother's death certificate. You will also have to submit property tax paperwork to the County Assessor so the home won't be reassessed under Proposition 13.
Don't try this at home. It's easy to make mistakes with deeds unless you know what you are doing, and if you make a mistake with the property tax paperwork you could trigger a reassessment that would cost your family thousands of dollars.
Your mother did what's called "poor man's estate planning." Instead of creating a trust to avoid probate, she put the names of her four children on the home. It may work out alright, but that depends on the details. If the deed to your mother's home is not a joint tenancy, then it's a "tenancy in common." If this is the case then your mother's one-fifth share of the home will be subject to probate administration. If her share is worth under $100,000, there won't have to be a full probate, but a Probate Referee appraisal and a court petition will still be necessary.
There are other potential drawbacks to what your mother did. If she was on Medi-Cal benefits then her one-fifth interest in the home is subject to a Medi-Cal estate recovery claim, whether or not the home was titled in joint tenancy. Also, the home was subject to judgment liens and creditor claims of all four children from the date your mother recorded her deed. If one of the children is disabled then his or her eligibility for public benefits may be at risk due to this inheritance. Those are just a few examples. Your mother may have inadvertently done things right - or at least right enough, but it's best to create an actual estate plan with an estate planning attorney and not to rely on chance.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, 3-4 PM on Newstalk 910 AM.