Legal Question in Investment Law in California

In the 70�s the parents bought some land in the desert for $10,000 and built a house and then Caltrans through eminent domain bought the house and some of the land to build a freeway. Caltrans compensated them $125,000 specifically for the replacement of the house which they rebuilt on part of their remaining land. In the 90�s the parents deeded the house to their four children and continued to live there until their recent deaths. The children recently sold the house for $400,000. To calculate the children�s Capital Gain responsibility would you add the $10,000, $125,000, the costs related to selling the house and other major improvements and subtract it from the $400,000 selling price?


Asked on 2/02/16, 10:12 pm

1 Answer from Attorneys

Unfortunately your parents made a very bad mistake in deeding the property to the children while they were alive. If they had conveyed the property to the children upon death by will, or trust distribution, the children would have received a "stepped up basis," meaning the only taxable gain if any would be the difference between the value of the property on the date the second parent died, and the date of sale. As it is, the best you can hope for is that the parents took the necessary steps to have the $125,000 for rebuilding the house treated as a section 1033 exchange (similar to a 1031 exchange only for replacing property lost through eminent domain). Otherwise there is an unpaid taxable gain on the $125,000 on top of the $400,000, less $10,000, costs of sale and major improvements if any. In any case you most definitely do NOT add the $125,000 to the basis. You certainly don't deduct money received for part of the property from other money received for the remainder of the property to determine the taxable gain.

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Answered on 2/03/16, 1:44 am


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