Q: My mother added my sister to the title of her house. When my mom bought the house, it cost $26,000. Now, it’s worth $500,000.
When my mom dies, will my sister and her husband receive the $500,000 exemption if they move into the house and live there for two years?
A: The answer to your question depends on how your mother and sister own the home. Is title to the home held “jointly” with rights of survivorship or do they each own a specific share of the home.
Also, if your mother has a will, the will may have an effect on the ownership of the home. That is, if your sister is a half owner of the home, but the will gives you the other half, your sister won’t get the sole benefit of the home.
Let’s assume that your mother and sister are holding title to the property as tenants in common, and so they each own a 50 percent share each in the home. And let’s also assume that your mom’s will directs that you receive her half of the property. After your mom’s death, your sister moves into the property and lives there for two years.
Two years later, your sister sells the property. She would be able to keep up to $500,000 in profits tax free, but she would own only one-half of the property.
You would have inherited the property at the home’s market value on the day your mom died. So, let’s say the property was worth $500,000 on the day of your mom’s death. Your share would be worth $250,000.
If you and your sister sell the property two years later for $500,000, you would be able to keep your $250,000 tax-free because that, in effect, is the value at which you inherited the property. Your sister’s cost basis would be $13,000, which is one-half what your mother paid for the property. She could then keep her share tax-free because has lived in the house for two years.
Here’s my question for you: If your sister does move into the house, and you do own half of it, will she pay you rent for using your portion? Or, will she simply pick up all of the costs of living in the property, including maintenance, real estate taxes and the mortgage?
Please talk to an estate attorney or your accountant for more details. Or, take a look at IRS Publication 523, “Selling Your House.”
Leave A Comment