Legal Question in Tax Law in New Jersey

Re: Selling of non-primary home

Having received the property by gift, rather than by inheritance, the children take over your father's cost basis, which is his original purchase price plus any improvements made over the years. Added to this amount is the value of his retained life estate which was extinguished when he passed away. This requires a calculation based upon life expectancy tables and the market value of the property at the date the new Deed was signed. Let's make some assumptions to illustrate before we go on. Assume your father bought the property for $50K, improved it over the years with another $25K, and it was worth $125K on the transfer date. Assume his life estate has an exterpolated value of another $25K. This would give the children a cost basis for determining their gain/loss on the sale as $100K. (This is his cost of $50K, plus improvements of $25K and the life estate value of $25K.) The house is now sold for $150K. There is a $50K profit on the sale (long-term capital gain). Split 3 ways is $16,667 each child. Each child reports $16,667 of gain on their personal returns ($50K being one-third of the $150K sales price, less $33,333 of basis - one-third of the $100K basis). Federal taxes are due on each recipient's $16,667. Since the estate and property were NJ related, a tax return is required to be filed in NJ (this can be either for the estate or as a NJ joint venture), which will pass the gain through to each recipient. Depending upon the recipient's state of residency either a resident or non-resident NJ return must then be filed and a tax paid. If, using the above illustration, the recipient's income attributable to NJ is less than $10K, a NJ return will not be required nor any tax due. Thus, it is possible that some, but not all, recipients may have a NJ tax liability. I am also an accountant and can assist you in preparing the necessary NJ returns. Finally, you shyould be receiving a Form 1099R for the sale. It may only show 2 of the 3 individuals receiving proceeds. This may require additional documents to correct if this happens. If 3 forms are issued (1 for each recipient) no additional documents may be required.