A Capital Gains Tax Mistake – Part 1

A client called recently after receiving his income tax return from his accountant.  Much to his surprise, he was facing a significant 6 figure income tax bill.  So why was he calling us?  We don’t prepare and file income tax returns.   The reason had to do with the sale of real estate that he inherited from his mother – or so he thought.  Allow me to explain.

I asked him how he came to acquire the real estate.  He said that he had received a part of it when his father died and the rest when his mother died.  A few follow up questions, however, led me to believe that his recollection might not be entirely correct.  I told him I would look up the county clerk’s records to locate the deed so we could be sure.  Turns out he was only partly right.

What I was able to confirm was that Mom and Dad owned the property together as husband and wife.  When Dad died Mom became 100% owner.  That part he had correct.  Mom, however, did not transfer 1/2 to him at that time.  Instead, she transferred the whole 100% to him while she was alive.

I then asked him how much his parents had purchased the property for and how much he sold it for.  Once I had this information I understood why his tax bill was so large.  I asked him whether the pros and cons of transferring the property while Mom was alive vs. waiting till she passes away were discussed with the attorney who prepared the deed.  He said as far as he knew nothing was discussed with the lawyer about tax ramifications.

It all made sense to me.  While there was no tax bill to pay at the time Mom made the transfer, Mom and Son were completely unaware of what awaited Son years later when he eventually did sell the property.  Next week I’ll share with you why he faced such a big tax hit and how it could have been avoided.