Dear Benny: My two brothers and I inherited a house when my mother died in February 2011.
We have been to court for probate, where we submitted my mother’s will and paid the estate tax. My brothers both agree that I can have the house and that I should take title to it.
The mortgage is paid. My parents are listed as the home’s owners on the updated county land records website.
What steps I do need to take to change the house title to my name and to show that my two brothers do not want to share in the title? Is this something I can do myself by submitting certain documents to the county? –Edward
Dear Edward: The process is not as simple as you may think, as there may be tax issues involved.
I have to give you only general advice, as state laws differ regarding probate proceedings.
Since your mother died, you have indicated that you went to probate. In many jurisdictions, the personal representative becomes the owner of the property.
Technically, the PR should then prepare a deed conveying the property as instructed by the will. In your case, the deed should reflect that you and your two brothers own title either as joint tenants with rights of survivorship or as tenants in common. If any of your brothers have their own family, they would want title to be held as tenants in common.
Then, your brothers should prepare a deed conveying their one-third interests to you.
You really need an attorney to assist you. For example, I do not know if your jurisdiction will permit the PR to just convey the property to you, thereby bypassing the need to have two sets of deeds.
And as indicated, there may be tax consequences. Each of your brothers have inherited one-third of the property. If they are giving it to you, this will be considered a gift, which may require each of them to prepare, and file with the IRS, a gift tax form.
Finally, you have to determine what your tax basis of the property will be. When you ultimately sell, you may be able to exclude some of your profit, if you have owned and used the house for two years out of the five before it was sold.
According to IRS Publication 523, “Selling your Home,” you can exclude up to $500,000 of the gain on the sale of your main home “if all of the following are true: you are married and file a joint return for the year (of sale); either you or your spouse meets the ownership test; both you and your spouse meet the use test; and during the two-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.”
But your house may appreciate in the future more than the up-to-$500,000 exclusion (or if you do not file a joint return, the exclusion is limited to up-to-$250,000 of gain), in which case you may have to pay capital gains tax. More importantly, there is absolutely no guarantee that Congress will preserve this favorable tax benefit for American homeowners.
Accordingly, you must determine now what your tax basis is. You really should consult with local counsel knowledgeable about real estate, tax and probate matters.
Your attorney can also advise you about a concept called “disclaimer.” This means that your brothers file a statement stating that they are not interested in the inheritance.
State laws differ about the deadlines for filing such a disclaimer. Under federal law, generally one must disclaim within nine months from the date of death. This will keep the property from being owned by your brothers for federal tax purposes.
Dear Benny: You frequently write about the stepped-up basis when a property is inherited.
In today’s market, however, you may find the reverse situation.
For example, let’s say I purchased a house for $600,000 several years ago. The current value is $400,000.
If my children inherit the house, can they keep the $600,000 base or do they have to lower the base to the new present market value of $400,000? If they sell the house for $400,000, can my children divide up this $200,000 loss and use it on their individual tax returns? –Art
Dear Art: The heirs cannot take a loss when they sell the property for less than their stepped-down basis unless the property is held for investment, in which case they can offset the loss against any capital gains and deduct an additional $3,000 per year of excess losses.
I am not sure what you would need to do to convert the property into investment property in these circumstances (or whether estate property is automatically treated as such if the heirs don’t live in it as their principal residence.)
I believe the answer is that the property retains the same character as it had when held by the decedent, which was not for investment, but welcome guidance on this technical issue from my readers.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.