Legal Question in Real Estate Law in California

Re: Selling property in California

I'm not a tax expert, and I think your mother-in-law should consult one with a potentially large tax bill looming, but it seems to me the main part of the answer here revolves around a fact not mentioned: whether, prior to her husband's death, she was the sole owner, or whether she inherited a 50% interest, or a 100% interest. Since you say "they" bought the property in 1974, I'll assume your mother-in-law inherited a half interest when her husband died.

The inherited half interest would, I think, receive a stepped-up basis; i.e., instead of $42,500, the capital gain on the inherited half interest would be based on its value in December, 2006, probably closer to $292,500.

If this is so, the total tax base is $292,500 + 42,500 or $335,000, and if it is sold for $585,000, the gain is $250,000. Since she has a $250,000 exemption, looks like no taxable gain would result.

Don't forget that other costs can be added to the basis (such as permanent improvements) and other expenses can be deducted from the selling price (commissions, closing costs) in determining the taxable gain, if any.

Again, consulting with a tax advisor is highly recommended; there are other questions the advisor would need to ask and my opinion is only a broad general statement of principle.

Re: Selling property in California

Much depends upon unanswered questions and there are a multitude of potential answers depending upon the facts. For instance, if your mother's husband and your mother owned the property as joint tenants, when he died, his one-half interest would have enjoyed a "step up" in basis from the value at the time of purchase (assuming he was an owner) to the value on the date of his death (Dec., 2006). Then, as a joint tenant, your mother would own 100% of the proeprty, with one-half having a 12/06 basis and one-half (your mother's) with a basis from 1974. Then, upon a sale, your mother could exclude $250,000.00 from capital gains, and then pay only capital gains on the difference in the sales price and what she paid for the property in 1974, after deducting $250,000.00, IF she lived there as her principal residence for at least 2 of the last 5 years. This is just one example based upon hypothetical facts; your mother needs to go to a tax advisor and give him or her the actual facts for a conclusive answer.