My late mother bequeathed her condominium to me 10 years before her death as part of a termination procedure. I was told by my income tax advisor that she should have paid some kind of tax. But she has never filed income tax for years as she was not required to do so due to her low income and was not asked to do so by her estate finance planner who handled the dismissal process for her.
I also live in California, just like my mother. I read online that under state law, if I sold the condo I would only get what it was worth at the time of cancellation and pay tax on that amount. Is that true? My late mother originally bought it with cash 26 years ago. I am currently renting it out through a property management company.
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Quitclaim certificates can be useful as a workaround in real estate transactions in very specific cases. However, it does take a certain amount of finesse to make sure everything is kosher as you now seem to find the decision has been made.
So what is a Quitclaim Certificate? It is a deed transfer that has no guarantee or protection of title. In essence, the giver – in this case your mother – has given you the rights to their property and transferred it to your name.
The main risk with this type of transfer is that the beneficiary or recipient of the document is only entitled to what the donor is entitled to. So if someone else actually owned or had a right to the property, the deed of termination could be worthless. For this reason, legal experts only recommend filing a notice of termination if you know and trust the other party, as you did with your mother.
One of the advantages of a quitclaim is that the transfer of ownership is not always subject to the same taxes as a typical transfer of ownership. But that doesn't mean it's tax-free. I have two guesses as to what taxes your accountant mentioned. He may have been referring to the document transfer tax payable on filing the deed – unless the termination records provide an exception.
"One of the benefits of a quitclaim is that the transfer of ownership is not always subject to the same taxes as a typical transfer of ownership, but they are not tax exempt.”
But what seems more likely here is that your mom never filed a gift tax return. Since no money was exchanged between the two of you when you handed over your condominium, the transfer is considered a gift.
There is a lifetime exemption from gift tax, which means that any gifts below this amount are non-taxable. As of 2021, the lifetime exemption is $ 11.7 million, which means that if the total amount of gifts a person makes over their lifetime is less than that amount, they will not be required to pay tax on them.
There are also annual exclusions. The annual gift tax exclusion for 2021 is $ 15,000. If a gift exceeds this amount, a gift tax return (called Form 709) must be filed (unless the gift was made between spouses, in which case it is exempt) along with all supporting documents for the gift. This does not mean that a tax should be paid unless the amount of the gift was greater than the lifetime allowance.
From what you've described, it sounds like your mom never filed a gift tax return on the set-aside claim. She should have done this even if she didn't have to file an income tax return because of her low income. Her failure to do so means she could have been penalized by the Internal Revenue Service. If she had an accountant, these too could be punishable.
According to the IRS, there are penalties for "willful failure to file a tax return in a timely manner, willful attempts to evade or evade payment of taxes, and undervaluation resulting in underpayment of tax".
If you haven't been contacted by the IRS, chances are they never knew of the termination. However, that won't let you off the hook. My advice would be to contact a tax attorney who can determine if you owe money to the IRS and sort the matter out.
As for your second question, there is capital gains tax on the proceeds of a home sale. Capital gain is usually the difference between the price a person paid for a house and the price they sold it, minus the cost of home improvement. The level of the tax rate depends on a person's income and registration status. There are exceptions here as well.
"The calculation of the capital gain is more complicated in the case of residential property that is obtained through an exit entitlement.”
For a single person, the first $ 250,000 of income from the sale of the home based on this calculation is exempt from tax if the home was their primary residence. To qualify as their main residence, they must have lived in the apartment for at least two years in the past five years.
On investment property, like your late mother's condo, there are other ways to avoid capital gains tax, such as a 1031 exchange. With this approach, the proceeds from the home sale must be reinvested to avoid taxes, although certain rules apply.
The implications for you of selling the condominium will largely depend on how the property has been used, as I just outlined, and what the cost base of the home was.
This is where the resignation process your family has gone through complicates matters. "California allows you to transfer your property to children through a deed, but your child could be detrimental if they ever want to sell the property," California law firm Lynk Law wrote on a blog post.
If your mother had simply left the house to you in her will, you would have received an increase. This means that the "cost" of the house to you when calculating your profit would be based on the value at the time of your mother's death when you wanted to sell the house.
Instead, your profit will be based on how much your mom paid for the condo when she originally bought it. This could make the capital gains from selling the home much larger if, for example, she bought the home for $ 100,000 in 1980 and it was worth $ 400,000 when she died. To ensure that you lower your tax liability as much as possible when selling the condominium, it pays to always hire a tax professional to guide you through possible exemptions.
I don't want you to take this information and regret the choices you and your mom made as I am sure she wanted only the best for her child. It is possible that you will convert the apartment into your primary residence for a few years after the current tenants move out to ensure that you get the most out of this wonderful gift from your mother.