I need some creative thinking here since a few lawyers cannot come up with an acceptable solution. Let me explain. 2 married couples own a home purchased for 20k. Now worth 2 million. One couple dies (soon not yet we know which one from cancer). Their son A gets the stepped up basis and avoids capital gains tax. But how? So far we have 2 bad outcomes to choose from. Either keep the house for decades paying property tax and maintenance. It’s too old to rent out. Or sell it immediately. Then daughter B (her parents) will owe hundreds of thousands to the IRA. We need a better solution. Up until now everyone is very friendly unless forced into one of those scenarios. How can we avoid all the capital gains tax on half the house? And still get the cash from other half? By working together?
Ideas please. Of course you’re not a lawyer and neither am I just want a possible direction to consider. Probably involving trusts and expensive lawyers and documents I can accept that…
The simplest and cheapest solutions are usually the best. I’d avoid lawyers and conflict and sell the house. Split the money gained equitably, and part ways.
I don’t see why that is necessary. House sells, say for $2,000,000. Each gets $1,000,000. One person has to pay some out in the form of capital gains tax. The other does not. That seems fair to me.
A can at any time file a partition lawsuit to force a sale, right? I mean either partner could but A is the one who would benefit from doing that.
So understand that A can at any time unilaterally decide that a sale is happening, B’s future capital gains not withstanding. Anything A does for B is above and beyond what A owes B in any way.
Also IANAL but can’t B’s parents just reinvest the money in a new home to avoid paying capital gains? Or depending on the state if this was their primary residence they wouldn’t pay anyways.
On what basis is the house co-owned? Is it tenants in common or something else?
Also I wonder if anyone has considered consulting the IRS, either directly or through a third party?
Also, there is a kind of person called IRS Enrolled Agent, they don’t work for the IRS but they have some kind of special qualifications to deal with them; I had to use one once with a very good outcome, you could hire one to work on behalf of all the owners to straighten this out.
What is your role in this scenario? Because it sounds to me like they’re talking about selling the house, but the son of the first couple is saying, “Let’s wait until my parents are dead, so I will have lower taxes” and the second couple or their daughter says, “Well, if we do that, then you should pay half of the capital gains tax we will owe.” Is that interpretation correct?
Well, if they’re quibbling over this now, then just sell while both couples are still alive and everyone loses the same amount to taxes.
If it were up to me, I’d say wait until the first couple is dead and then both parties contribute an amount equal to the capital gains due. Each party pays half the tax bill that only one party owes while the other half of the money goes to some charitable endeavor (Habitat for Humanity, for example) with each party receiving an equal charitable deduction.
However this is settled, both parties end up with more money than most people see in a lifetime.
Something to factor in here is that Biden’s tax plan includes abolition of the step-up in basis upon inheritance. (An extremely good idea, since this is a ridiculous tax loophole.)
Changes in tax law are not usually retrospective. I’m not sure, but I think changes that occur in 2021 could apply to tax year 2021 without violating that principle.
Does anyone know what the precedent is on this? If an administration passes changes in tax law mid-2021, would it be unusual for that change to apply to tax year 2021, i.e. from January 2021?
My guess is that the earliest it would apply would probably be from January 2022, but I’m really not sure.