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We are in Michigan, USA. A couple years before my mother-in-law passed away she signed her house over to my wife and her sister via a quitclaim deed. Only the mother-in-law and father-in-law (both deceased now) were owners and on the mortgage. We do not have original purchase documents.

After she passed we sold the house for $80,000. The money was used to pay off the mortgage, some other funeral expenses, and sent $15,000 to other family members. All the money was dispersed at the closing of the house. My wife and her sister each ended up with about $20,000.

How do we go about claiming this income? Since there was a quitclaim deed I guess we technically owned the house for a few years prior to its sale. How does that affect our tax and what is the basis? Is the basis the selling price (fair market value) or something else? How much does each sister claim for gains?

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  • Where are you? Jurisdiction will change the answer.
    – Peter K.
    Commented Sep 3, 2015 at 16:28
  • who was on the mortgage the last few years? Do you have documents that tell you what the original purchase price was? Was the mother-in-law the only owner?
    – mhoran_psprep
    Commented Sep 3, 2015 at 16:47
  • Sorry we are in Michigan, USA. The Mother-in-law and deceased father-in-law were the owners and the only ones on the mortgage. I do not think we have original purchase documents. My wife has an idea but no proof.
    – mitnworb
    Commented Sep 3, 2015 at 16:53

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First, the basis is what was paid for the house along with any documented upgrades, any improvements not consider maintenance. Any gain from that point is taxable. This is the issue with gifting a house before one passes. It's an awful mistake. The fact that there was a mortgage doesn't come into play here nor does the $15K given away. Your question is great, and the only missing piece is what the house cost. Keep in mind, depending on the state, you MIL may have gotten a step-up on the passing of her husband.

On a very personal note - my grandparents bough a family house. 4 apartments. 1938 at a cost of $4000. My grandmother transferred 1/2 share to my father well before she died. And before my father's death it was put into my mother's name. Now that she's in her last years, I explained that since moved it to my sister's name already, there's no step up in basis. This share is now worth over $600,000, and after 4 deaths, no step up. When my sister sells, she will have a gain on nearly 100% of the sale price. In my opinion, there's a special place in hell for lawyers that quit claim property like this. For a bit of paperwork, the house could have been put into a trust to avoid probate, avoid being an asset for medicaid, and still get the step up. Even a $2000 cost for a good lawyer to set up a trust would yield a return of nearly $100,000 in taxes avoided.

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  • So your saying we are on the hook for 100% of the sale price minus the original purchase price + improvements? 1/2 for my wife and 1/2 for her sister?
    – mitnworb
    Commented Sep 3, 2015 at 18:12
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    Perhaps. Depending on the state and when the husband died, there may have been a step up already. Any improvements can add to basis. Last - you need a good estate attorney, there are some strange rules regarding the giving of an asset in anticipation of death. I am not a lawyer, or familiar with those rules. Lawyers, you can pay them now or pay them later, but they have their place.
    – JTP - Apologise to Monica ♦
    Commented Sep 3, 2015 at 18:17
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    This is why my wife is on the title as co-owner for every property her parents own. Taking care of these details now (in her 30's, and her parent's 60's) make this a lot easier to deal with down the road.
    – corsiKa
    Commented Sep 3, 2015 at 21:40

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