Q: My dad just died. For reasons I don’t understand, my mom was not on title to their house. The house has appreciated a lot since they bought it, and Mom wants to sell. I can understand she no longer wants to live in the house she shared with my dad for many, many years. Will she have to pay a large amount of capital gains? Christie.
A: Christie: My condolences. I know it’s hard to deal with financial issues while grieving for your loved ones, but life must go on.
The first thing you have to do is get yourself a real estate or probate attorney. Your mother cannot sell the house because she does not own it. If she had been on title, then she would have ownership interest; however, here, she is an outsider.
Hopefully your dad had a last will and testament giving the house to your mom. In most states, some form of probate will be required; talk with your attorney.
If there was no will, then the law of your state – called intestacy laws – will decide who gets what. Never fear; your mother will get the house.
Once she has title, then of course she can sell it. Now let’s analyze the tax situation. Let’s say the property was worth $700,000 on the day your dad died. Unless Congress repeals this aspect of the tax law, your mother gets what is known as the “stepped up” basis of the house – i.e., the value of the property on the date of death.
So your mother’s tax basis is $700,000. If she sells it for that price, there is no gain and no tax to pay.
But let’s assume she finds a buyer who will pay $800,000. (For the purpose of this article, I am ignoring various expenses that can increase the tax basis). She has made $100,000.
To take advantage of the up-to-$500,000 exclusion of gain (for married couples filing joint tax returns or up to $250,000 if you file a single tax return) we rely on the use and ownership rule: you have to have owned and lived in the house for two out of the five years before sale.
However, only one spouse has to meet the two year ownership test. So long as your mother lived in (used) the house for at least two years– and they filed a joint tax return – she can exclude up to $500,000. Thus, she walks away with the entire net sales proceeds.
That’s a sweet deal for all home sellers. I hope our Congress will not take that important tax benefit away.
* * *
Q: Can you talk about third-hand smoke in a property? The seller was a heavy smoker and the selling broker took efforts to temporarily hide this condition before I bought it. It’s in California, but I’d love to hear about this topic generally.
A: Scott: One of the many reasons why I write this column is that I learn something every day from my readers. I know about second-hand smoke, but never heard of third-hand before you sent in your question. In fact, my research told me that there is even “fourth-hand” smoke (look it up on the web).
Third-hand smoke is best defined as coming into a hotel room and smelling smoke. According to an analysis from the Mayo Clinic, it is “generally considered to be residual nicotine and other chemicals left on a variety of indoor surfaces by tobacco smoke.”
According to this report, even long after smoking has stopped, these particles “cling” to everything around the area where the smoking took place, including hair, skin, clothes, bedding and even carpets.
This is a relatively new area of medicine and research is ongoing to determine the consequences of being “attacked” by this residue.
According to noted medical doctor Sanjay Gupta, “People are exposed to third-hand smoke by inhaling it, ingesting it, or though direct skin contact. Infants and young children are especially vulnerable if they crawl on floors or put fingers in their mouths.”
Bottom line: it is definitely a health hazard.
I cannot comment on your situation, but strongly suggest that you retain a local real estate attorney. If you can prove that the seller and/or the listing broker attempted to “hide” this problem, you may have a good case.