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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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We live in Wisc. and bought a foreclosure farmette for $110,000

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We live in Wisc. and bought a foreclosure farmette for $110,000 6 months ago, on behalf of our son. The intent is to sell the farmette back to our son after he sells his current house.

Our son now has sold his home and is starting to do a major overhaul on the house. He took down walls to create an open concept and is totally redoing 2 bathrooms with all new fixtures, adding another half bath, complete kitchen overhaul with appliances, new furnace/ac and duct work and new flooring throughout.

Our son's mortgage broker said before he closes on a new mortgage loan to buy the farmette back from us all the remodeling must be done, at which time the new value is expected to be 150,000 - 170,000. Since we'll need to sell the house for 40,000 - 60,000 more, can we claim all the improvements that been done against the Capital Gains? Our son also wants us to assist him with the downpayment by using a Gift of Equity. for $35,000.

Should we have any concers with this type of transaction?

Following are my views on your transactions - please correct if needed.

 

Facts

You are giving your son a property with the fair market value of $170,000 and in exchange you will get $110,000 .

So - you will give a gift valued $60,000 or $60,000 / $170,000 = 35%% of the property.

Your basis on the property is $110,000 (purchase price) + $20,000 (assumed improvement expenses) = $130,000.

 

Conclusions:

1. You sell your son 65% of the property for $110,000. Your basis on that part is $130,000 * 65% = $84,500.

Your capital gain on that part $110,000 - $84,500 = $25,500

2. You gift your son 35% of the property with the value $170,000 *35% = $59.500.

Gift is not taxable income for your son. You - as a donor - might has to file a gift tax return as the gift is above $13,000 (for 2009) per person per year.

However there will not be any gift tax unless her lifetime limit of $1,000,000 is reached.

3. Your son's basis in the property $110,000 (purchase price on 65% he would purchase) + $45.500 ($170,000 * 35% - your basis on the gifted part) = $155.500

 

Let me know if you need any help.

 

Customer: replied 7 years ago.

LEV, thanks for your reply. Bases on your response, I have a few more questions:

1) If my husband and I file jointly and make 60,000 a year, how much would be the Capital Gain tax on the $25,000 you mentioned?

 

2) My son's family consist of himself, wife and 3 children. Can we gift the whole family or just our son?

 

3) What tax forms will be required?

 

4) Is there a dollar limit on the improvement expenses? Is there a site or form that indicates what qualifies for improvement expenses? Are receipts sufficeint proof?

 

1) If my husband and I file jointly and make 60,000 a year, how much would be the Capital Gain tax on the $25,000 you mentioned?

If you sell the property in less than a year - that would be short term capital gain - taxable at your regular tax rate. Most likely - you are in 15% tax bracket - so you will owe about 15% federal and 6.5% Wisconsin income tax on that additional gain.

If you sell after owning it at least a year - the situation would be different.

 

2) My son's family consist of himself, wife and 3 children. Can we gift the whole family or just our son?

Yes - you may split gifts - but you are not going to have a whole family listed on the title? Also each of you - you and your spouse may make separate gifts.

 

3) What tax forms will be required?

To report the sale transaction and a capital gain? - schedule D - http://www.irs.gov/pub/irs-pdf/f1040sd.pdf - part I

 

4) Is there a dollar limit on the improvement expenses? Is there a site or form that indicates what qualifies for improvement expenses? Are receipts sufficient proof?

There is no limit of expenses.

But you need to separate repair and improvements.

I suggest to use IRS publication 523 - http://www.irs.ustreas.gov/pub/irs-pdf/p523.pdf

See page 9 for examples of improvements.

Yes - purchase receipts and usually sufficient - but you do not need to send them to the IRS - just keep for your record in case of audit.

 

Please provide the information above to your tax preparer for considerations.

Let me know if you need any help.

 

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