Hi lily1958-ga -
I'm sorry to hear that your mother is in poor health. First off, I'd
like to suggest that the final decisions you make regarding your
mother should be taken with expert advice of an attorney or an
To help you in this process, I'd like to point you to the Internal
Revenue Service's regulations regarding (1) the profit realized by the
sale of your mother's house; and (2) the gift tax.
(1) PROFIT FROM SALE OF HOUSE
Your mother stands to realize a gain of up to $255,000. This would be
considered income and taxed as income. However, the regulations
permit her to exclude from her income up to $250,000 profit from the
sale of a primary dwelling. So the maximum taxed income resulting from
the sale would be $5000.
In the exact words of the IRS in Publication 523
About 1/3 of the say down the web page:
"Excluding the Gain
"You may qualify to exclude from your income all or part of any gain
from the sale of your main home. This means that, if you qualify, you
will not have to pay tax on the gain up to the limit described under
Maximum Exclusion, next. To qualify, you must meet the ownership and
use tests described later...."
"You can exclude up to $250,000 of the gain on the sale of your main
home if all of the following are true.
* You meet the ownership test.
* You meet the use test.
"Ownership and Use Tests
"To claim the exclusion, you must meet the ownership and use tests.
This means that during the 5-year period ending on the date of the
sale, you must have:
* Owned the home for at least 2 years (the ownership test), and
* Lived in the home as your main home for at least 2 years (the use test)."
There are complex ways to figure out what the actual value of your
mother's house is for tax purposes. This is called the "basis. " Since
she owns the house free and clear, she would probably use the actual
cost (plus original closing costs) as her "basis." More on basis can
be found in the same page (near the top).
"Cost As Basis
"The cost of property is the amount you pay for it in cash, debt
obligations, other property, or services.
"Purchase. If you buy your home, your basis is its cost to you. This
includes the purchase price and certain settlement or closing costs.
Generally, your purchase price includes your down payment and any
debt, such as a first or second mortgage or notes you gave the seller
in payment for the home. If you build, or contract to build, a new
home, your purchase price can include costs of construction....
"Settlement fees or closing costs. When you bought your home, you
may have paid settlement fees or closing costs in addition to the
contract price of the property. You can include in your basis some of
the settlement fees and closing costs you paid for buying the home.
You cannot include in your basis the fees and costs for getting a
mortgage loan. A fee paid for buying the home is any fee you would
have had to pay even if you paid cash for the home."
Summing up, the taxes involved in the sale of your mother's house
would probably be minimal.
(2) THE HOUSE AS A GIFT
The other option that you mention is the gift of your mother's house
to your brother.
IRS Publication 950 covers the gift tax.
http://www.irs.gov/publications/p950/ar02.html#d0e180 (web page)
http://www.missouribusiness.net/irs/pdfs/p950.pdf (pdf document)
"The gift tax applies to the transfer by gift of any property. You
make a gift if you give property (including money), or the use of or
income from property, without expecting to receive something of at
least equal value in return. ..."
In your mother's case, the gift of her house to your brother, $11,000
in 2005 and $12000 in 2006 of the FMV of the house would not be
counted for tax purposes.
"Annual exclusion. A separate annual exclusion applies to each
person to whom you make a gift. For 2004, the annual exclusion is
$11,000. Therefore, you generally can give up to $11,000 [12000 in
2006] each to any number of people in 2004 and none of the gifts will
After this tax free amount, however, a "credit" of up to $345,800 would be allowed.
"A credit is an amount that eliminates or reduces tax. A unified
credit applies to both the gift tax and the estate tax. You must
subtract the unified credit from any gift tax that you owe. Any
unified credit you use against your gift tax in one year reduces the
amount of credit that you can use against your gift tax in a later
year. The total amount used during life against your gift tax reduces
the credit available to use against your estate tax. " (page 3 pdf
(Presently, the lifetime credit a person can take is $1,500,000. Any
credit taken in one year is subtracted from the lifetime amount. This
can be ignored by your mother as she has only the one asset.)
To sum up your mother's case: the entire FMV of your mother's house
would fall under the 12000 exclusion and the 345800 tax credit. To
use a hypothetical example in your mother's case:
Let's say the sale of the house is 280,000.
Subtract original price leaving 255,000
Subtract 12000 (exclusion) 243,000
Taking 243,000 in credit, tax is 0
Even though she will not owe taxes using the exclusion and the credit,
she will have to file a Gift Tax Return.
From the pdf document http://www.missouribusiness.net/irs/pdfs/p950.pdf (page 6):
"Filing a Gift Tax Return
"Generally, you must file a gift tax return on Form 709 if
any of the following apply.
* You gave gifts to at least one person (other than
your spouse) that are more than the annual exclusion
for the year....
*You and your spouse are splitting a gift.
*You gave someone (other than your spouse) a gift
that he or she cannot actually possess, enjoy, or
receive income from until some time in the future.
*You gave your spouse an interest in property that
will be ended by some future event...."
Form 709 is available in pdf form (
http://www.irs.gov/pub/irs-pdf/f709.pdf ) Note the exclusion is
already included on Line 7. I include this 2005 form for information
purposes. You will have to get the 2006 form when it is published by
Form 709 instructions in pdf form
(http://www.irs.gov/pub/irs-pdf/i709.pdf ) Note that you have to
figure out the tax on the amount over 12000, but then you get a credit
reducing what is actually owed to zero.
The exclusion change from $11000 to $12000 is detailed here:
Federal Estate and Gift Tax Changes Coming in 2006: Annual Exclusion
Amount Increased to $12,000
Your mother might also like to arrange for either your brother or you
(or both) to assume power of attorney over her finances. This would
mean her business decisions could be legally be made by one of her
children, relieving her of this responsibility.
" A Power of Attorney is a legal instrument that is used to delegate
legal authority to another. The person who signs (executes )a Power of
Attorney is called the Principal. The power of Attorney gives legal
authority to another person (called an Agent or Attorney-in-Fact) to
make property, financial and other legal decisions for the Principal.
" A Principal can give an Agent broad legal authority, or very
limited authority. The Power of Attorney is frequently used to help in
the event of a Principal's illness or disability, or in legal
transactions where the principal cannot be present to sign necessary
You may wish to have the power for just the one transaction of selling
the house (nondurable) or a longer lasting one (durable) that would
be effective for the lifetime of your mother.
"A "Nondurable" Power of Attorney is often used for a specific
transaction, like the closing on the sale of residence, or the
handling of the Principal's financial affairs while the Principal is
traveling outside of the country.
"A "Durable" Power of Attorney enables the Agent to act for the
Principal even after the Principal is not mentally competent or
physically able to make decisions. The "Durable" Power of Attorney may
be used immediately, and is effective until it is revoked by the
Principal, or until the Principal's death."
Power of Attorney
In summary, you can see from the above that either a sale of the house
or its gift to your brother would not result in a tax burden. Perhaps
you should arrange to see another lawyer and CPA than the ones who
For a lawyer referral here is the website of the Florida Bar Association:
The Florida Bar Lawyer Referral Service Online
And here is the website of the Florida Institute of CPAs (referral page)"
Online Directory: Personal Taxation
Web Search Terms:
"unified credit" gift tax
Florida Bar Association
CPA Association Florida
Power of Attorney
I'd like to remind you that I am not an attorney or a CPA. This
answer is the result of searching the web, mainly the official IRS web
site. I hope this is a start for your brother and you to make a
decision regarding your mother's assets. I believe that you can
settle her financial problems so that her care will be provided for.
The best of luck to you and your family,