What are the tax implications of selling a parent's home in Maryland while they are alive vs after their passing?

Question

I am considering selling my mother's house in Maryland to help cover her final expenses. She has lived in this home, which is solely in her name, since 1948. We are planning to sell it for around $300,000, while the original purchase price was about $13,000. There have been some enhancements, including a dining room and a porch. Are there tax implications we should be aware of for selling the house while she is still alive, especially in terms of capital gains, as opposed to selling it after her passing?

Cedulie Renee Laumann · Answer

In a word, "yes".  There are definitely tax implications and very often differences between selling real property during the original owner's lifetime vs. after their death.  An online post cannot analyze what your specific tax consequences would be in either case (it is more of a question to pose to a tax professional familiar with your situation) but a very general outline follows.   
 
Generally, anytime property has gone up in value (especially when property has been held for 50+ years!) capital gains taxes should be a consideration.   The "gain" or increase in value is generally taxed at capital gains tax rates.  To use a very simple example, if someone has $100,000 in gain and a 20% capital gains tax rate, they would pay $20,000 in capital gains tax.  
 
When children (or others) inherit property, under current law they get a new, "stepped up" basis.  That means that the new starting point for figuring out gain (or loss) is the value at the original owner's death, not the original owner's original basis.    
 
In many situations this makes a huge difference for actual capital gains taxes owed, in others not so much.   Whether the owner is living is only part of the equation.  Under tax law at the time I'm writing this people can exclude $250,000 in gain for their home IF they sell it AND have lived in it as their principal residence 2 of the 5 years before selling.    For example, if Mr. Jones lived in his home 20 years and moves in with his daughter 6 months before selling, he likely can exclude $250,000 worth of gain.  However, if Mr. Jones moved out of his house 6 years before he sells, that exclusion no longer applies and Mr. Jones pays capital gains on the whole thing.

While it is appropriate to be thinking of these issues and asking questions,  to get an answer relevant to your particular situation it is best to contact a professional who can sit down with all the relevant facts. Obviously only the owner themselves or someone with legal authority to act on their behalf can ultimately decide what to do with their own assets after considering all relevant factors.  Usually any decent estate planning will at least mention capital gains as well as other considerations (for example the pros/cons of leaving property through probate vs. a revocable trust vs. other planning tools like life estate deeds).   Or one could research the IRS treatment of capital gains as it relates to the sale of a residence as well as the rules surrounding getting a stepped up basis.   While not legal advice I hope this general information helps.

James L. Arrasmith · Answer

Selling your mother's house while she is alive creates a potential capital gains tax liability. Because the home is solely in her name and she has lived there since 1948, if she sells it during her lifetime, she may qualify for the $250,000 exclusion of gain from the sale of a principal residence, provided she meets IRS use and ownership tests. With an estimated sale price of $300,000 and an original basis of $13,000 (plus any adjusted basis from capital improvements), she might not owe any capital gains tax if the exclusion covers the gain. 
 
However, if you sell the home during her life and she gifts the proceeds to you or transfers the home to you before the sale, you may inherit her cost basis. That would mean you could face capital gains taxes on the full appreciation from her original basis—unless she qualifies and applies the homeowner's exclusion herself. Additionally, Maryland may assess state capital gains or income tax depending on how the transaction is reported. 
 
If she passes away and you inherit the property, the cost basis will step up to the fair market value at the date of death. Selling it soon after that likely results in little or no capital gains tax. This step-up in basis can significantly reduce or eliminate any tax owed on the sale. 
 
You should also consider Medicaid implications if she’s receiving or will soon need long-term care. Transferring or selling a home could impact eligibility, and timing matters. Make sure to document any improvements made over the years, as those can increase the cost basis and reduce taxable gain. 
 
Estate planning and tax consequences hinge on the timing of the sale, the structure of the transaction, and the potential for stepped-up basis. Each path has distinct financial consequences, and advance planning helps you avoid costly errors.

Q: What are the tax implications of selling a parent's home in Maryland while they are alive vs after their passing?