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Updated 4 months ago on . Most recent reply

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Marcus Welson
4
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16
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Capital Gains and Basis on Interest Acquired Over Time through Surviviorship

Marcus Welson
Posted

Hello everyone. 

I'm trying to confirm my understanding of a less straight forward capital gains scenario than the one-time purchase and sale most deals involve.

Essentially 100% interest in a condo was acquired over time, as each joint tenant passed away, leaving 1 sole tenant who gained full ownership by rights of survivorship.

I've gotten differing opinions from different professionals and am trying to understand the calculation of the basis and the final capital gains  tax that would be due myself so I can spot bad advice and understand deals.

Assumptions:

A condominium
No depreciation has ever been taken by any owner.
No 1031 exchange.
No expenses or improvements. (to keep things simple)
Property was primary residence for Person A from original purchase until 01/2020. The property was then rented from 01/2020 through today's date.

• A condominium was purchased by Person A on 11/1986 for a property value of $52,700.

• On 11/2015, the condo real property was quit claim deeded by Person A to Person B as a joint tenant with rights of survivorship and Person C as a joint tenant with rights of survivorship. The property value on this date was $80,000.

• On 11/17/2020 person A died. The property value on this date was $180,000.

• On 01/2023 person B died. The property value on this date was $240,000.

• Person C is still alive and will be selling the real property today for $290,000 with an expected net profit of $235,000.

Overview of Ownership and Basis Calculation


1. Initial Purchase by Person A (11/1986):
• Purchase Price: $52,700

2. Transfer of Ownership (11/2015):
• Value at Transfer: $80,000
• Ownership Structure:
• Person A: 33.33% (approx. basis $26,667)
• Person B: 33.33%
• Person C: 33.33%

3. Death of Person A (11/2020):
• Fair Market Value at Death: $180,000
• Step-up in Basis for Person C upon death of Person A:
• 33.33% of $180,000 = $60,000
• New Basis for Person C: $26,667 (original basis) + $60,000 (step-up) = $86,667 for 66.66% ownership.

4. Death of Person B (01/2023):
• Fair Market Value at Death: $240,000
• Step-up in Basis for Person C upon death of Person B:
• 33.33% of $240,000 = $80,000
• New Basis for Person C: $86,667 (previous basis) + $80,000 (step-up) = $166,667 for 100% ownership.

5. Sale of Property (10/2024):
• Sale Price: $290,000
• Net Profit: $220,000

Capital Gains Calculation


1. Calculate Total Basis for Person C at Sale:
• Basis: $166,667

2. Calculate Capital Gains:
• Selling Price: $290,000
• Basis: $166,667
• Capital Gain = Selling Price - Basis = $290,000 - $166,667 = $123,333

Depreciation Recapture


• Since no depreciation has ever been taken by any owner, there will be no depreciation recapture to consider in this case.

Final Capital Gains Tax Calculation


• The total capital gains that Person C will be liable for upon selling the property will be $123,333.

Summary


• Capital Gains for Person C: $123,333
• Depreciation Recapture: $0 (since no depreciation was taken)

My
Questions

Is the above estimated capital gains tax correct? If not, please indicate any errors you see. 

Does the use of the property as a personal residence by person A and the limited rental period affect the capital gains in any way?

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