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Thursday, May 23, 2019

Parents left the house to 3 sons, now there's a tax surprise for two of them

Below is a question that was asked of me on one of the tax-related threads on this blog. Because it's something I hear very often, I think it would be a great question to share with all readers.

"Dad left his PR to 3 of us. Bro lives in it as his PR. Dad died last year. Value of house at DOD was 90k. Then got letter indicating 120 now. Realtor wants to try to get 120k for it. How much capital gains? Does bro not pay it?"

For those of you who may not speak legalese and/or shorthand, in the above question I believe "PR" to be "principal residence" and "DOD" to be "date of death".

When your father died, there was no capital gains tax on the transfer from him to other parties.This is because it was your father's principal residence.

Once your father passed away and the property changed hands, you start over with an entirely new tax slate. It's no longer your father's home so if the property has increased in value since your father's death, that increase cannot be sheltered under his principal residence exemption.

Using the numbers you provided, the maximum gain should be $30,000. Half of the gain is taxable. In other words, there is a $15,000 taxable gain.

Now, who has to pay that, if anyone?

It sounds as if there are three equal owners, so the tax is split equally between you three. But one brother lives there and claims it as his principal residence. This means he is claiming an exemption to the usual capital gains tax rules, and on the face of it, he seems to be correct. So most likely the brother who lives there won't have to pay anything on his third. The phrasing of your question sounds as if you expected he'd be the one dealing with ALL of the tax, but he can only claim an exemption on what he owns. He only owns 1/3.

Whether you and your other sibling have to pay tax on your thirds will depend on several factors. If you both own other properties and live in them, as I expect is the case, you can't claim your father's former residence as your principal residence. You'll each have to pay your  share of the tax. On the other hand, if you live somewhere else but you rent instead of own, then you might still be able to claim an exemption for your third.

I recommend that you find a tax accountant in your area to confirm what I've told you here, since I'm not an accountant myself. However, my comments here reflect what I believe will be the outcome.

This tax schmozzle is just one of the many reasons I constantly urge parents not to leave their homes jointly to their children. You certainly would not be the first person to get a big tax surprise after inheriting a house you don't live in.


  1. "Using the numbers you provided, the maximum gain should be $30,000. Half of the gain is taxable. In other words, there is $15,000 in tax."

    $15000 is *taxable* (for the OP, $5000 is taxable at their marginal rate)

  2. Lynne, how do you think they could have handled it differently?

    1. In the will, the father could have left "the estate" to the 3 sons rather than "the house". Most people take it literally when the house is left to everyone, and they put all the names on the house automatically, following the will.

      The father's will should have been drafted so that the sons had flexibility in how they dealt with the assets.

      After the father's passing, the house could have been sold and the money split between the sons.

      If they didn't want the house to leave the family, one of them could have bought out the other two sons.

      Those are my initial thoughts. There may also be other possibilities.



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