5/26/11: Dealing With Elderly Mother’s House

Housing Counsel

By: Benny L. Kass

Q: My mother is 89 years old and has been in a nursing home almost 5 years. I am contributing to the cost of her care. I have 2 questions. One is how to transfer the title of her house when she dies? I have her old will done in the 1960’s naming me as the sole beneficiary. The second question is can the money which I have contributed over the years be deducted from the sale of her house? This is her only asset.

A: Regardless of where in the Washington metropolitan area your mother’s house is, on her death, administration of her estate (called probate in some states) will be required. The probate laws vary in Maryland, Virginia and the District, so this discussion is general in nature. Your mother has a Last Will and Testament but it is at least 50 years old. Times – and the law – have significantly changed since the l960’s. Is your mother mentally competent? If so, you might want to have a lawyer review the will to make sure that there are no legal pitfalls. Keep in mind that the lawyer’s client must be your mother – and not you. Your mother may want to make changes – such as contributions of furniture or jewelry to a favorite charity or relative. She may even want to disinherit you. While this would be distasteful to you, it is her house and she has the absolute right to dispose of it as she wishes.

The will should name a personal representative, called “PR”. It may be you or someone else. The PR will file the will in the probate division of the court in the jurisdiction where your mother last resided before she died. Letters of Administration will be issued formally appointing the PR.

Under the probate laws of Maryland and the District, upon the death of your mother, once a PR is appointed, her property is automatically owned by the PR. In Virginia, however, title to real property vests automatically in the heirs or in the beneficiaries of the decedent’s will.

So, if the will directs that the property be given to someone other than the PR, the PR will prepare and file with the local recorder of deeds a Personal Representative’s deed conveying the property to that named person. In your case, however, since you are the sole beneficiary, you will merely prepare the PR deed, conveying the property to yourself.

What will happen if there are large debts owed by your mother, and the only asset is the house? If you do not have enough money to personally pay off those debts, the house may have to be sold to satisfy creditors. In Virginia, even if the property has already been vested in the beneficiaries, the PR retains the authority to sell in order to pay off all creditors.

There are other legal requirements placed on the Personal Representative. For example, in addition to paying creditor claims, real estate taxes and keeping the home insurance current, the PR must arrange to prepare and file federal and state income tax returns, as well as estate tax returns, if required. You should consult an accountant to assist you with these filings. You can obtain the federal income and estate tax forms on line from the IRS (irs.gov/forms and publications).

The PR should also obtain an appraisal of the house as well as all of the personal property. This is important to determine if there are any estate tax obligations.

Finally, the Personal Representative has the responsibility for preparing a final accounting of the estate’s assets and debts. Once this is done, and the PR is satisfied that all debts have been paid and all assets have been distributed, the process is over.

You do not necessarily need a lawyer to assist you, but the process can become complicated. Your mother has just died; you have more important things to do than deal with the legalities of probate, so it is recommended that you retain a local attorney whose practice includes estate and probate law.

Your second question can be answered easily. Since you will inherit the house, and presumably plan to sell it, all of the net sales proceeds – after paying off any creditors – will go to you. In effect, you will possibly get more money than you actually spent in the upkeep of the house.

Keep in mind that on your mother’s death, your basis for tax purposes is the value of the property on the date of your mother’s death. That is yet another reason why the PR should obtain an appraisal of the property.

This is known as the “stepped up” basis. Example: your mother bought the property for $50,000, but on the date of her death it was worth $500,000. If you sell the property for $500,000, you will not have to pay any capital gains tax. However, if you sell the property for more than that amount, you may have to pay capital gains tax on the difference between the $500,000 and the actual sales price (less real estate commission and certain closing costs).

However, if you decide to live in the house, and can prove that you have owned and lived in the property for two out of the five years before it is sold, you can exclude up to $250,000 of your gain. If you are married and filed a joint tax return, and your spouse has also lived in the property for at least the two years, you can both exclude up to $500,000 of any profit.