South Bend, IN asked in Estate Planning and Real Estate Law for Michigan

Q: My grandfather added me to his home with a quit claim dead a year ago. He was added about 20 years prior with a quit

Claim by my grandmother who has since passed. He’s is ill and I’m trying to figure out how I can sell the home without paying taxes on it since she paid $45000. 50 years ago but has since refinanced and owes $120000. The selling price would be between $300000 and $350000. Im located in Michigan of that matters

2 Lawyer Answers
Kenneth V Zichi
Kenneth V Zichi
Answered
  • Estate Planning Lawyer
  • Fowlerville, MI
  • Licensed in Michigan

A: There will be an ‘offset’ for ant mortgage, but if you’re asking about the capital gains the answer is ‘welcome to the downside of quit claim deeds. You have acquired the basis for tax purposes of the original owner and will need to pay capital gains.

Absent some other facts you don’t share I don’t see a way around this at present. There ARE things you can do if you’re not pressed to sell immediately but I would urge you to consult with a local lawyer to explore ALL the facts of your case.

Brandon S. Dornbusch
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Answered
  • Estate Planning Lawyer
  • Traverse City, MI
  • Licensed in Michigan

A: Without reviewing the deeds, which would be necessary to give a definitive answer, assuming your grandfather was added to the deed as a joint-tenant-with-right-of survivorship, he received a half step-up in income tax (capital gain) basis when your grandmother died. Since then, it's likely the property appreciated significantly. If your grandfather conveyed it to you as a joint-tenant-with-right-of-survivorship, your grandfather might be able to exclude 50% of the gain as a joint tenant upon the sale under IRC section 121, assuming the home is his primary residence and he hasn't used that section 121 exemption within the last 5 years. But your 50% of the home sale proceeds would be taxable (assuming you don't live there as your primary residence).

A better method might be conveying your interest in the home back to your grandfather, then your grandfather could execute a Lady Bird Deed conveying the property to you upon his death. Then, upon his death, the property would receive a full step-up in income tax basis to its fair market value under IRC Section 1014(b)(9), instead of just a half step-up if you inherit it as the surviving joint tenant. Then you could sell the home without much, if any, income tax liability (the gain would be limited to the increase in value between your grandfather's death and the sale).

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