Q. We recently sold our mother’s house in Southern California. She will receive a profit from the sale based on her cost basis. Unfortunately, mother is currently in assisted living with progressive memory loss. She has been in assisted living for about 10 months, and while she was there we packed her stuff, cleaned up and prepared the house for sale. Now that the house is sold, we want to know if there are ways to minimize the tax burden on the sale. --Jimmy Wong, Cloverdale, CA
A. For anyone looking after the affairs of aging parents, the sale of a house isn’t just a sale of a house—it’s a tax issue, an estate issue and even a long-term health care issue.
Let’s start with the taxes. The profit from the house is considered a capital gain, so your mom, assuming she is single, can get the $250,000 primary residence exclusion. (See IRS Publication 523, Selling Your Home.) Your challenge is to make sure that the cost basis of the home includes all the improvements your mother made over the years. Those repairs and addition can raise the home's cost basis and thereby reduce the size of the tax bill.
But you'll need to document those improvements. “This is where it gets hard when you’re dealing with someone with diminished capacity,” says Michael Delgass, the CEO of wealth management firm Sontag Advisory. You'll probably end up digging through old bank statements, receipts, and credit card statements. “Some people keep detailed records, others don’t,” says Delgass. “You might want to go to your building office to see if any permits were filed and also contact the home insurer.”
Fortunately, since your mom moved out only ten months ago, the home still meets the IRS definition of primary residence—you must have owned and lived in the home as your main residence least two of the last five years leading up to the sale. This requirement can sometimes get tricky for elders, since they may be moving in and out of nursing homes, or staying elsewhere part of the year. Still, there are special rules for someone who’s been in extended nursing care or assisted living. “Any time you spend in a care facility counts as being in your primary residence as long as it’s a licensed facility,” says Delgass. “You can’t just take a trip around the world.”
In hindsight, one way to eliminate the tax burden entirely would have been to wait to sell the house until your mother passes away. The value of the home at the time of the owner's death can become the new tax basis for the heirs, who can then sell the house free of capital gains tax. (You only pay federal inheritance tax on estates greater than $5.4 million.) Of course, in your case, the house is already sold—and your family may have needed the money now to pay the assisted living bills. But for anyone else in this situation, letting the house pass to the heirs is worth considering, if you can afford to wait.
Even if you are able to minimize the capital gains tax from the sale, you may be facing a different problem down the road if your mother winds up in a Medicaid facility and wants to qualify for benefits. To become eligible, people generally must spend down their money prior to a five-year look-back period. Each state has its own set of Medicaid rules, and you will probably need the help of an eldercare lawyer to sort things out. “You really have to get out in front of this stuff as it can take three to five years,” says Delgass. “You need to make everything come to conclusion at the right time.”
Konigsberg is the author of The Truth About Grief, and a contributor to the anthology Money Changes Everything. The views expressed are solely her own.