Originally Posted by Wnhough
in general, most inherited property does not result in a hit from the IRS.The IRS doesn't impose a tax on most inherited property. However, after you become the owner of a given asset, you are responsible for paying tax on the income it earns. For example, if you inherit rental property, you must include the payments you receive from tenants in your taxable income. Likewise, if you sell inherited property and earn a profit, you may owe capital or ordinary gains tax, depending on the type of asset and the nature of the sale. ( ALSO if the property earned income , in your case if those accounts earned taxable income while the decedent was alive, you may owe tax on the amount you receive after his death). You must also pay income tax on any amount you earn after the assets are legally yours; both your MIL and inlaws need to pay taxes on taxable income generated from the accts.
More details I have learned:
Family Farm occupied by inlaws for 25 years
Father-in- Law passes in 2011; farm and land (70 acres) re-deeded to mother-in-law and 3 adult children via Life Estate. This was executed based on advice from retirement planning attorney.
Mother-in-law continues to live in house.
Family farm home remodeled in summer 2014 for upcoming sale - $46,000
Family farm home sells in Feb 2014 for $155,000 (home plus 2 acres)
Land (70 acres) sells in Aug 2014 for $175,000
Based on lawyer advice, two investment accounts were created:
One, in theory, representing my mother-in-laws portion of the sale, and the other containing the siblings portion (3 siblings in one account)
The breakdown was based on Life Estate Mortality Table – Mother-in-law 43.6% / siblings 56.4%
The mother-in-laws invest account was actually taken out in the 3 siblings names – the premise being: if m-i-law became incompacitated in the future (beyond 5-year look back window established by Medicaid for existing assets) that those monies would be seen as those of the children.
If incompacitated before 5-year window, this account would be seen as m-i-laws assets. This portion would be considered “gifted” to children at $28,000 per couple ($14,00 husband/$14,000 wife) total of $84,000
Can I include the home and land together, for my m-i-laws portion, 175k+155k *43.6% = 231k – improvemens of 46k – 185k, and report together as home. M-i-law is allowed 250k exemption from capital gains if living in home or
Would I have to separate home = 155k and exempt all of this and she pay gains on the land (if any)
Can all gains from both investment accounts be divided by (3) siblings and be recorded on their taxes, or will gains from “m-i-laws” account have be reported on her tax return?
Does the “gifting” monies have to be reported to the IRS? Form 709?