How must I handle proceeds from an inherited property?

February 18, 2004

Subject:  Questions about quit claim deeds
From:  Tim
Date:  Thu, 29 Jan 2004

My mother-in-law passed away late last year, and my brother-in-law is now buying her house from his sister (my wife) and his other brother. Quit claim deeds have been executed by all necessary parties. Brother #1 and the house are in Missouri, my wife and I live in Virginia, and brother #2 lives in California. My question has to do with how the proceeds from the buyout must be handled.

  1. My wife and I would like to donate our proceeds to our church. Do we have to report the proceeds as income or capital gain, or can we just have the mortgage company transfer the money directly to the church?

  2. Are there upfront taxes that have to be paid on this money (less than $30,000)?

  3. If we report the money as income or capital gain, then donate it to the church, can we still claim an itemized deduction for the donation for 2004?

  4. Is there a way to avoid reporting the proceeds as income or capital gain and still get a tax benefit for 2004?

Thank you and God bless you!
Tim

Answer

Date:  Mon, 02 Feb 2004

Hello Tim,

Under Internal Revenue Code Section 1014, the tax basis (cost to determine gain or loss for income tax reporting) of inherited property is adjusted to the fair market value on the date of death or the alternate valuation date, if applicable. The acquisition date is the date of death, but the property is deemed to be held more than one year, qualifying for long-term capital gain or loss. Therefore, your wife should have little or no gain for the sale of her share of the property to her brother.

I didn't find any income tax withholding requirements for sales of real estate in Missouri. You can confirm this with the escrow company. If there is any, you can recover it when you file your income tax return. There is no federal withholding required for a sale like this. Other transfer taxes may apply.

You can have the escrow company pay the proceeds to your church on your behalf and claim a tax deduction for the charitable contribution. Remember to get a written receipt from the church, including a statement that no goods or services were received by you in exchange for the donation.

Good luck!
Mike Gray

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