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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I owe a percent of my fathers house through an investment trust

Customer Question

I owe a percent of my fathers house through an investment trust which was designed by his attorney to protect much of the house from medical assistance if he needed it. I currently own 73% of the house. We are about to sell the house. His attorney told me I will owe capital gains tax on my interest. This house is located in Minneapolis, MN. It is being sold for $317,000 and was originally purchased for around $38,000. If there is tax, what would the rate be, so I can plan.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.

Hello barbara,

 

Have you ever used the home yourself as a primary residence?

 

Did you inherit this home from your father or just how did you come about your 73% interest?

Customer: replied 5 years ago.

I did live in it during college and graduate school up until I was 25 years old full time.

 

My father is still alive. We have to sell the house because he is in a care home and can not live there anymore.

Expert:  Merlo replied 5 years ago.

When was your name added to the deed? Was it during the time you lived in the home?

 

How long has it been since you or your father lived there?

Customer: replied 5 years ago.

Is there something else you need?

 

My name was added in the last ten years. He lived there until six months ago

Customer: replied 5 years ago.
Do you have another question?
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

I was trying to see if you possibly qualified to exclude part of this gain by claiming the exemption for sale of a primary residence. However, if you have not owned or lived in the home for the past 2 years, then this would not apply.

 

The gain on the sale of this home would be treated as a long term capital gain, and that tax rate is currently capped at 15%. So the total gain on the sale would be $317,000 less $38,000 for a gain of $279,000. Your share of this gain (73%) would be a little under $204,000, for taxes of approximately $30,600.

 

Those are the current rates for the 2008 tax year. If the home is not sold until after the first of this year, then it is very likely you will face increased taxes if the sale occurs in 2009, as the new administration has already announced plans to increase the capital gains tax rate.

 

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

 

Thank you.

 

Customer: replied 5 years ago.
So, If my portion is $40,000, I have to pay over $30,000 in taxes and keep $10,000? Is that correct?
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

No, absolutely not. If your portion of the gain is only $40,000 then your taxes would be 15% of that or a total of $6,000.

 

But I thought you said you owned 73% of this home? If that is the case, your share of the gain would be close to $204,000 as explained in my above calculations. If your share is less than 73% and you will only personally have a gain of $40,000, then $6,000 is the most you would owe in federal taxes on this gain.

 

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

 

Thank you.

 

Customer: replied 5 years ago.
Most the house has been mortgaged, and is being paid back to the bank. Of the $317,000 $228,000 is being given back to the bank. $20,000 for closing costs, and an additional $9,000 for the buyer. Whatever is left of that, we get back, and of that, I get 73%.
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

Okay, that does make a difference. If you have a mortgage of $228,000 and $20,000 for closing costs and $9,000 for the buyer, then you are really only getting a total of $60,000 net for the house. If your share of that is 73%, then your share of the gain is roughly $43,800, and your maximum federal tax would be $6,570.

 

Again, as I said earlier, that is based on tax rates for 2008. If you do not complete the sale until 2009, you may face increased taxes as a result of any changes made to the tax code by the new administration.

 

 

Thank you!

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and 7 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
The sale is on January 23,2009. Can you please tell me what the tax percent will be so I can plan to hold back that money? I will then accept.
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

There is no way to say for certain what new tax rate the new administration may actually implement, however, they are currently proposing to raise the long term capital gains tax rate from 15% to 20%. If that ends up being the case, then your tax on this sale would be approximately $8,760.

 

With the economy being in the shape it is right now, it is possible that Obama may put off any proposed tax increases, but you may want to put aside the $8,760 just to be on the safe side.

 

 

Thank you.

 

Expert:  Merlo replied 5 years ago.

Hello barbara,

 

I must apologize here, but I gave you the wrong information when I said you could exclude what you owe on the mortgage from your gain. I did not mean to include that amount in the calculations.

 

The amount you owe on the mortgage actually has nothing to do with the gain you have from the sale. Whether you owe the full amount of the sale price or if you owe nothing, it does not figure in to the calculations. If the original purchase price of the home was $38,000, then somewhere along the line you must have borrowed money against the value of the home as the value increased. That being the case, you are now simply repaying that loan, but it does not lower your gain on the sale.

 

You would be allowed to deduct the $20,000 closing cost and the $9,000 going to the buyer from the sale proceeds, but that still leaves you with a net gain of $250,000. Your share of that gain (73%) is $182,500. Your taxes at 15% would be $27,375 and at 20% would be $36,500.

 

I apologize for the confusion but wanted you to have the correct information.

Customer: replied 5 years ago.
I guess I am confused. Before you gave me a very different answer. This is part of a trust. So, the taxes are $36,500, so basically, I get nothing from this, is that correct?
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

Depending on the type of trust the home is held in, the trust itself may be responsible for the taxes on the sale. Did the attorney who is handling this indicate whether it would be the trust or you personally who is responsible for the taxes?

Customer: replied 5 years ago.
The attorney said this is a life estate remainder interest trust. Does that affect things?
Customer: replied 5 years ago.
Hello, did you see the above comment?
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

That being the case, the taxes from the profit on this sale would be paid by the owners and not by the trust.

 

The problem here is that on the surface it may look as though you are paying back your entire gain in taxes, but you have to figure that somewhere along the line you were given this money by the bank as a loan. So at some point in time you actually received these profits "up front" when the loan was obtained from the bank. You are now simply paying back the loan out of the sale proceeds rather than from the money the bank gave you originally.

 

 

Customer: replied 5 years ago.
The house is being sold, and the new buyer is paying for the house at $317,000. My father had to pay taxes on the amounts he took out in equity, if that makes sense.
Expert:  Merlo replied 5 years ago.

I am not sure what you mean when you say your father had to pay taxes on the amounts he took out in equity.

 

Loans that are obtained by an individual, regardless of their source, are not taxable income -- unless of course someone took a loan from a 401K plan and then never repaid it. But if a home equity loan or loans were taken out on this home, then no taxes would have been due on the loan amounts.

 

Where did you get the information that he paid tax on these amounts?

Customer: replied 5 years ago.
Does it matter that I am 55 years old?
Expert:  Merlo replied 5 years ago.

Hello again barbara,

 

No, age has nothing to do with the rate you would pay on the gain from this sale. The only thing that would give you an exemption is if you had both owned this home for at least 2 years and if you actually lived in the home for at least 2 of the past 5 years.

 

If you met both of those requirements, then you could claim a partial exclusion for the sale of your "primary residence".

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