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Heir ponders tax implications on inheritance if split with sibling

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Q: My mom recently passed away. She was 91. We sold her condo this year while she was still alive. We put the proceeds from the sale in an account, which I held with her jointly, with rights of survivorship. I have had this arrangement with her for some 20 years. The account was exclusively for her benefit. All of her known bills are paid. I held a power of attorney for financial matters for her while she was alive.

The condo sale was for $150,000. She qualified for the personal residence exclusion. I am assuming that the title company will report the sale to the Internal Revenue Service. Are there any tax implications for the money I received from the joint account? I plan to split what remains in the account with my brother and we are good and totally transparent with each other.

A: Our condolences on your mom’s recent passing. But, it sounds as though you and she had her affairs in order, and your good relationship with your brother will undoubtedly be helpful as you heal from this loss.

You mentioned that your mom sold her home prior to her death and that she qualified for the home sale exclusion. We assume you’re referring to the Internal Revenue Service code provision that allows homeowners to sell their home and not pay taxes on up to $250,000 in profits. If you are married, you can exclude $500,000 in profits from tax with the IRS.

As we’re sure you’re aware, the rule requires the owner of the home to have lived in the home as their primary residence for two out of the last five years. There are other rules, but those are the big ones. You can get the full rundown of the requirements from IRS Publication 523, Selling Your Home.

Given that your mom likely lived in the home for many, many years and it was her primary residence, the sale of her home would not trigger a taxable event with the IRS. You should be good on that end. Having said that, make sure the title company reported the entire sale on your mom’s Social Security number. Unless there’s something else going on that you didn’t share, there wouldn’t be anything owed to the IRS.

Now, let’s deal with the bank funds. After the deal closed, the settlement agent or title company sent the proceeds of the sale to your mom’s bank account. You and your mom were both on this account. Based on the information you provided, it appears that the total value of your mother’s estate was low. In any event, it’s likely to be far less than the number that would trigger any federal estate taxes. As such, your mom’s estate would not have any federal estate taxes to pay.

Finally, you inherited the money in her account at the time she died and you don’t have to pay any tax on that inherited money. When it comes to estate taxes, the giver of the gift may have taxes to pay, but as we mentioned, your mom didn’t have any federal estate taxes to pay. For 2022, the estate tax cutoff is $12,060,000. This means that if you die and your estate is valued at an amount lower than the $12.06 million dollar limit, you owe no federal estate taxes at all.

At the state level, you might have some taxes to pay, but you’d need to look into that with an estate attorney or tax practitioner that knows the estate laws of the state in which your mom lived.

As far as splitting the money between you and your brother, the tax implications should be the same for both of you. There is one issue that is of interest. Since you inherited all of the money in your mom’s account at the time of her death, you might want to check with a tax practitioner about the tax implications when you split the money with your brother.

If the IRS considers all of the money yours, you can give your brother $16,000 per year without any federal tax consequences. But if you give him more than $16,000 in a year, you might have to file a gift tax tax form with the IRS. You can still share the money, but in this situation, the money you give him would count against your $12.06 million dollar estate limit (which is scheduled to be reduced significantly in 2025, although we’re not sure this will ever happen).

If you wind up talking to your tax preparer or an estate attorney about whether your mom owes estate taxes, you might want to ask what is the best way to handle the transfer of funds to your brother. You’re looking for a win-win: You want to handle the funds properly, but make sure you don’t wind up with any unintended negative consequences for you.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)

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