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Children face tax questions following auction of mother’s home

Dear Benny: This could be a tax dilemma.

There is a contract for auction of real property (my mother’s home) dated Feb. 18, 2011, between the auction company and signed by me, her daughter, as power of attorney. The property consisted of two parcels: (1) a number of acres of vacant land purchased in 1963 and (2) the home purchased in 1939.

Both purchases were made by my mother and father. My father died in 1976.

The auctioneer was contacted by a buyer willing to buy the vacant land, and he presented this offer to me on Feb. 25. This buyer was not interested in the parcel containing the home. I accepted the offer, and the vacant land was sold for cash March 16.

My 95-year-old mother moved to a retirement home in June 2010 after a heart-related problem and planned to stay there through the winter but intended to return to her home in the spring.

She fell in early January and had to go into assisted care. After a three-month decline, she died unexpectedly March 24. After her fall, we had decided to sell the property to pay for her care.

The auction for the home had already been scheduled and advertised for April 9. It was conducted as scheduled and the home was sold. My brother and I are the sole heirs, and I am the estate executor.

My questions: (1) Can the $250,000 home-sale exemption be used for tax year 2011? (2) Since both parcels adjoin and were used as part of the home, do they qualify as one sale under the $250,000 exemption? –Mary Ann

Dear Mary Ann: You have raised a three-part question: the taxable consequences of (1) the sale of the vacant land while your mother was alive, (2) the sale of the home after her death and (3) whether the lot can be included in the up-to-$250,000 exclusion of gain for single taxpayers (or up to $500,000 if taxpayers file a joint tax return).

I was not sure of the answer to question No. 3, so I went to the Internal Revenue Service’s website (www.irs.gov).

In Publication 523, titled “Selling Your Home,” I found the following language: “To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least two years during the five-year period ending on the date of sale.”

Land: If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land.

Example: You buy a piece of land and move your main home to it. Then, you sell the land on which your main home was located. This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land.

Vacant land: The sale of vacant land is not a sale of your main home unless:

• the vacant land is adjacent to land containing your home;

• you owned and used the vacant land as part of your main home;

• the separate sale of your home satisfies the requirements for exclusion and occurs within two years before or after the date of the sale of the vacant land; and

• the other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land.

If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain.

So, the answer to No. 3 and No. 1 is that the exclusion of gain regarding the vacant lot is not applicable.

As to question No. 2, you and your brother can take advantage of the “stepped-up” basis. In other words, the value of the home on the date your mother died is your tax basis.

If you sell for that price, there is no gain. Anything above that price is taxed by the IRS at the capital gains rate, which currently is 15 percent (and any applicable state and local tax).

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 benny@inman.com.

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