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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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Penalties on sale of home

Customer Question

On a transfer of deed, will I have to pay capital gains taxes if property is sold within 6 months? I did a deed transfer with my families home and I want to sell it right away. I took a equity loan against property to pay my family for the property. I am married but only myself was put on the deed although my husband and I file married jointly on our income taxes. I was told I could sell it the next day without any tax consequences. is this true?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Assuming the former owner of the property is still alove and gifted the property to you, then you assume their cost basis in the property.  Thus, if you sell the property for more then the cost basis of the person who gifted it to you, then yes you will owe taxes.


Further, the person who gifted the property may be required to file a gift tax return and pay gift tax (or at least use up some or all of their lifetime exemption).


If you inherited the property the situation changes in that your cost basis becomes the fair market value as of the date of death of the decedent who willed you the property.  Then you are only taxed on gain realized since the date of death.


Please be a little more specific about how you came to own the property.  Did you inherit it or did the individual gift it to you?

Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: It was neither a gift or inherited situation. There was a transfer of deed to my name and a loan was given to me against the equity of the property. I did pay transfer taxes and points at this closing. My father is alive and is no longer on this deed.

He was paid 150,000.00 from this equity loan and it is a matter of record that the property was sold to me at this price. what are the tax consequences for the both of us?
Expert:  Christopher Phelps replied 11 years ago.
A couple of more questions.  What was the fair market value of the property at the time the deed was trasnferred to you?  Is there another loan outstanding on the property?  If so how much? 
Customer: replied 11 years ago.
The fair market value or tha appraised value is approx. $450,000.00 and there are no other loans on this property.
Expert:  Christopher Phelps replied 11 years ago.

Ok, thats what I thought might have happened.  I assume your Father has transferred this property to you for $150,000.   What has apparently occurred is what is called a "bargain sale". 


Essentially, you have two transactions where one part is considered a gift and the other is considered to be a sale. 


Your father effectively completed a gift to you of $300,000 (i.e. $450k-150K or 2/3 of the property).  He must file a gift tax return (i.e. Form 709) for the year of transfer and report the gift.  No gift tax will be required to be paid, however, he will use up $300k of his $1,000,000 lifetime gift exemption.  Also, he will be treated as completing a sale of 1/3 (i.e. $150k/$450k) of the property.  If he meets the requirements under Sec. 121 he may exclude any gain from be recognized and taxed.  To be able to use the exclusion he must have owned and used the property as his principal residence for at least two out of five years as of the date of transfer.  If he did not use the property as a residence then this part of the transaction is taxable to him to the extent of any gain recognized.  To calculate his gain he needs to determine his cost basis in the property and split it between the two transactions.  1/3 of the cost basis applies to the $150k sale and 2/3 of the cost basis applies to the gift.


For your purposes, any sale of the property by you is potentially taxable to you.  Your cost basis in the property is equal to the sum of the purchase price (i.e. $150k) plus 2/3 of your Father's original cost basis (i.e. the portion of your Father's cost basis allocable to the gift portion of the transfer).  When you receive a gift you retain the giftor's cost basis and holding period.   


Were you to sell the property within one year of transfer (I assume you will not qualify to use the Sec. 121 exclusion I discussed above), you will have a reportable transaction.  Specifically, 2/3 of the gain on the sale of the property will be treated as long-term capital gain (i.e. the gifted portion you received) and 1/3 will be treated as short-term capital gain.  The long-term capital gain is subject to a maximum Federal tax rate of 15%.  The short-term gain may be offset by other short-term losses.  Any short-term gain left after offset by any short-term losses will be treated as ordinary income (i.e. the same as dividends and interest) subject to your marginal tax rates.  If you hold the property for more then one year from the date of transfer, then all the gain will be treated as long-term capital gain.  Don't forget NY taxes.


Whether your Father reports the transaction as I described above is irrelevant to you.  You will be required by law to report any sale of the property as I described above.  So get the basis information (and his date of purchase) from your Father so you can properly report your subsequent transaction.

         

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