1) Mom & Dad bought a house in 1954, joint tenants w right of survivor.
2) Dad died in 1990, thus Mom owns the house outright (no mortgage).
3) Mom rewrote the deed in 1991 to include herself and her grown children as follows:
50% Daughter; 50% Mom and Son as joint tenants with right of survivor.
Mom continued to live alone in the house and pay all of its expenses and taxes.
4) Mom died in 2012, and therefore the house is owned equally by daughter and son.
5) The house is sold in 2012.
What is the cost basis for the daughter?
What is the cost basis for the son?
Is the son's cost basis actually made up of two partial numbers, one from 1991 and the other 2012?
There is no estate involved, no inheritance, aside from minor personal property.
I believe the case Mr. Wittlin is referring to is Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992). He is correct that the Gallenstein case might apply to your circumstances and may have the effect of increasing the cost basis the two of you had when you sold the house.
In very summary terms (and therefore most definitely not legal advice of any kind), under Gallenstein, if a joint tenancy with right of survivorship was created between spouses prior to Jan 1, 1977, and one of the joint tenants died after Dec. 31, 1981, and the decedent paid for all or most of the property, then the remaining spouse would get a date-of-death step-up basis on the full 100% interest in the property, not just the 50% interest that was formerly owned by the deceased spouse. Keep in mind that this can be a two-edged sword because it would probably apply to lower the basis of the entire property if it was worth less than what they originally paid for it.
Assuming that Gallenstein applies (and I'm just assuming, I'm not advising you that it does - only your own retained attorney can do that), and assuming the following facts:
(1) in 1954 your Dad paid $20,000 for the house;
(2) in 1990 the house was worth $200,000,
(3) in 1991 the house was worth $220,000,
(4) in 2012 the house was worth $400,000, and
(5) no improvements were made to the property during this entire time (for simplicity's sake)
then the results should be (no promises) roughly as follows:
(1) the original cost basis would be $20,000;
(2) when your Dad passed in 1990, your Mom would get a step-up basis to $200,000 in the entire property;
(3) when your Mom made gifts to Daughter and Son in 1991 - those were potentially taxable gifts - Daughter took a carryover basis of $100,000 (50% of Mom's original basis), Son took a carryover basis of $50,000 (25% of Mom's original basis), and Mom retained a basis of $50, in the 25% interest she retained;
(4) when Mom passed in 2012, Daughter had a cost basis of $100,000 (unchanged), and Son had a cost basis equal to $50,000 (his original basis in the gifted 25%), plus a step-up basis of $100,000 (25% of date-of-death FMV), for a total cost basis of $150,000; and
(5) as a result, Daughter and Son together had an aggregate cost basis of $250,000 in the entire house.
Thus, again assuming that Gallenstein applies to your circumstances, if the house were sold in 2012 for its then fair market value of $400,000, the taxable gain would be $400,000, minus $250,000, or $150,000. However, to determine how that total gain is split you have to do the computations on a per-individual basis. Since Daughter and Son are each entitled to 50% of the proceeds, Daughter's gain is $200,00 minus $100,000, or $100,000 gain, and Son's gain is $200,000 minus $150,000, or $50,000 gain.
On the other hand, if Gallenstein does not apply, then the basis computations should work out roughly as follows:
(1) original 1954 cost basis of $20,000;
(2) in 1990, Mom has an original basis of $10,000, and gets a step-up basis in 50% of the house, to $100,000, for a total 1990 cost basis of $110,000;
(3) when Mom makes gifts in 1991 to Son and Daughter, Daughter gets a carryover basis of $55,000, Son gets a carryover basis of $27,500, and Mom has a cost basis of $27,500;
(4) when Mom passes in 2012, Daughter has a basis of $55,000, and Son has a cost basis equal to $27,500 (original basis), plus a stepped-up basis in the remaining 25% interest equal to $100,000 (step-up to 25% of FMV on date-of-death), for a total basis of $127,500; and
(5) Daughter and Son would have a total basis of $182,500.
As a result, the gain on sale would be $217,500. Daughter's share would be $100,000 (50% of $400,000, or $200,000, minus $100,000 basis), and Son's share would be $72,500.
To get a reliable answer, however, you must consult with your own retained tax professional. You can't rely on my answer because I don't know all the facts and you haven't retained me.
www.nytaxcounsel.com
When your Dad died, your Mom got a stepped up basis in the property equal to the fair market value at the time of your Dad's death. When your Mom transferred the deed to her son and daughter, they received a transferred basis. Meaning that gifted assets retain the donor's basis. So no, it is not made up of two partial numbers. Hire a CPA or tax attorney.
You should have a lawyer review the deed from mom to son and daughter. Did she retain a life estate? This would affect the basis. Otherwise, basis may be a combination of purchase and death dates. Putting aside a court ruling, I believe in 1978, that may allocate the entire value at your father’s death to your mother under limited circumstances, your mother's basis is 1/2 of the purchase price in 1954 plus 1/2 of the value of the property at dad's death in 1991, plus any improvements made on the property. There is a fairly old case, I believe in 1978, that may give your mother the right to a step up to the full value of the house in 1991, but you need to get a lawyer involved to confirm this for you.
