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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hi, here is my question. My wife and I purchased a 5 acre tract

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Hi, here is my question. My wife and I purchased a 5 acre tract of land about two years ago on a land contract deal through the owner , we have a purchase agreement in our names. A little over a year ago we put a home on the property that my wifes mother signed for due to our credit being poor. We paid the down payment and also pay the monthly mortage to the lender.We also have a purchase agreement with the mother inlaw on the house. We have the house for sale and have an offer on it that after all notes are paid we will make about a 40,000 dollar profit, so my question is will anyone be liable for gains on this sale, because in all actuality it is our primary residence and not the mother inlaws secondary home. When we bought it the lender called it a buy for. Dont really want the tax man to beat us up on our profit because we plan on using it for next purchase.

Hello hookman,


Is your name actually listed on the title to the home? Is your name listed at all on the mortgage with the lender?

Customer: replied 8 years ago.
No our name is XXXXX XXXXX the title to the home but monthly bill is direct draft out of my checking account.
Customer: replied 8 years ago.
Hello Merlo, didnt receive last reply.

Hello again hookman,


There are a couple of issues here. First of all, the IRS does allow a home owner to exclude $250,000 (or $500,000 if married filing a joint return) from the gain on the sale of a primary residence before any excess gain is subject to tax. However, there are two rules which first must be met. Rule 1 is you must have owned the home for at least two years. Rule 2 is you must have lived in the home for at least 2 of the past 5 years preceding the sale. You indicated that you put a home on this property a little over a year ago, so even if you were the legal owner, it does not sound like you meet Rule # XXXXX which is the 2 year ownership requirement.


But even if you did meet both rules, unfortunately, even though you may have been making the mortgage payments on this property, under IRC Section 121 which allows an exclusion amount on the sale of a primary residence, you would not qualify for this exclusion if you are not listed as the legal owner of the home.


Your purchase agreement or intent to purchase does not allow you to take this deduction.


If your mother in law owned the home and lived with you in the home for two years, then since she is also the legal owner, she would be allowed to exclude $250,000 from the gain on the sale, if she had owned the home for 2 years and lived in it for 2 years.


Also you must remember that when you sell this property, the gain from the sale must be reported on your mother-in-law's tax return since she is the legal property owner. That means that she will be the only responsible for any taxes due on the gain.


If this has been helpful please press the Accept button. Positive feedback is also appreciated.


Thank you.


Customer: replied 8 years ago.
What will my mother inlaw be taxed? Also being that the property is in the original land owners name still how do they determin where the profit is made? On the home or was it made on the property?

Hello again hookman,


While I am certainly happy to give you tax advice, I am really not comfortable in trying to determine exactly how the sale would be handled, since your name is XXXXX XXXXX on the land deed. If you have a purchase agreement for the land, it would seem to me that you would have to first actually purchase that land before you could sell it, but I really think you need to post that question for one of the real estate attorneys on this website to answer.


However, regarding the tax situation, the gain would be figured by taking the total cost you paid for the property and the house combined. That would be your basis in the property. Your gain would then be the sale price less your basis.


Since you have held the property for more than one year it would be treated as a long term capital gain, and the tax on long term capital gains is currently capped at 15%. That is the most tax that your mother in law would be taxed. Depending on her tax bracket, part of that gain may even qualify for zero % taxes. What that means is that if she is currently in the 10% or 15% tax bracket, then any gain which she would have from the sale which would still keep her total income under the tax bracket of 25%, that portion of the gain would qualify to not be taxed at all. Any portion of the gain which put her income in to the 25% category would then be taxed at 15%.


I know this sounds very confusing to someone who is not used to working with taxes on a daily basis. But basically the very most she would pay is 15% on the gain, and possibly less if she is in a lower income tax bracket.


If this was helpful please press the Accept button. Positive feedback is also appreciated.


Thank you.


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