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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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selling 2 family home

Customer Question

I own a 2 family property in NJ. There are 2 people on the deed. I want to sell this property or transfer ownership to my partner to remove my name, get my partner his OWN mortgage, and possibly avoid capital gain tax. Is it possible to sell for the purchase price to my partner to avoid capital gain, get my name off the
deed assuming he can qualify for a mortgage? If we hold the property over 2 years is the capital gain tax excluded due to the fact that it is towards my lifetime
capital gain exemption amount? Thank you.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.
If you owned and lived in the property for two out of five years as of the date of the sale, then you will qualify to exclude up to $250,000 ($500,000 if filing MFJ) of capital gain from taxation. I assume you have not rented any portion of the property nor have you taken an exclusion within the last two years on another residence sale.

If you meet these criteria then you can sell to your partner and exclude some or all the gain. If you do not meet the two year ownership and residence test as of the date of sale, and you do not qualify for an exception, then you will be taxed on the gain.

You could gift the property to your partner but there would be complications if you owe a mortgage on the property. If you gift your interest in the property, to the extent you owe debt you will be treated as selling the property, subject to the same exclusion rules I cited above. You may also be required to file gift tax returns and use some of your lifetime exclusion (currently, $1,500,000).
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Dear Mr Phelps
I have been researching and find that since BOTH my and my partner's name is XXXXX XXXXX deed HE can
refinance in HIS name and then I can remove
my name from the deed with a small transfer fee.
A local attorney would have to assist with this
of course.
There would be no capital gains as we are both
listed on the current deed. Do you agree?

Thank you.
Expert:  Christopher Phelps replied 11 years ago.
Whether and to what extent you can refinance depends on how you hold title and what interest each of you has in the property.

If you hold title as tennents-in-common, each of you can theoretically sell, transfer or mortgage your interest independently. Thus, I assume if your partners interest in the property is sufficient collateral for the new loan (i.e. the bank will lend without first requiring you to sign over your interest in the property) you can do it the way you describe with only a gift tax consequence.

For example, if each of you own 50% of a property worth $500,000 with a $200,000 mortgage, I presume a bank may lend $200K to your partner to refi and take you off the existing mortgage. After the refi your interest in the property is now free and clear. You can then gift it (retitle with the help of an attorney) to your partner without the hassle of it being considered a sale (to the extent you are liabile for the mortgage). However, you will be considered to have made a $250,000 gift and will be required to file a gift tax return for the year of the gift.

If you currently own the property jointly I would first re-title (if the current lender will allow) into tennents-in-common so as to allow the technique above.

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