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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Good afternoon. Online system was causing problems, I may be charged twice.

My mother-in-law, who is a Russian citizen with a U.S. Green card lives with my wife, daughter and myself. She is currently in Russia and is selling her apartment. I did claim her as a dependent on my 2009 return, but may not do so in 2010... but that may raise IRS flags. The amount of the proceeds will be about $150K

1. What are the tax implications (to me) if the money is transferred to my checking account and then to hers (she has not setup a US account as of yet) when she returns?

2. What are the tax implications to her, i.e., captial gains or income for sale of a foreign residence

3. She would like to give at least $100K to my wife and I to either pay down our existing mortgage (have the payments recast) or refinance. What do we need to do to avoid any tax liabilities is it better to transfer the funds directly to our mortgage account or refinance? What can be legally arranged to avoid paying taxes?
Submitted: 3 years ago.
Category: Tax
Expert:  Merlo replied 3 years ago.

Hello JA Customer,

 

There is nothing you can do that will avoid the taxes that will be due on the gain your mother in law has from the sale of this residence, regardless of how the funds are used.

 

First, she may have the money transferred to your US account if she does not have one of her own. Transferring the money in itself is not what is a taxable event. The taxable event is the sale of the apartment.

 

If the property is in your mother in law's name, she is the one who will owe taxes on the sale. Assuming she has owned this property for more than one year, the gain would be taxed as a long term capital gain which currently has a maximum tax rate of 15%. Her gain on this sale would be figured by taking the sale price less her basis, less the cost of any selling expenses such as commissions. Her basis in the apartment would be whatever she originally paid for it, plus the cost of any improvement she made while she owned it. So as an example -- if she originally paid $80,000 for the apartment and then spent another $20,000 in improvements, her basis would be $100,000. If she sells the apartment for $150,000, she has a taxable gain of $50,000 at a maximum rate of 15%.

 

Your mother in law will need to report this transaction on her 2010 tax return. The US will allow her to claim a credit for any foreign taxes she may end up paying to Russia on this same transaction, which could reduce or even eliminate any taxes she owes here in the US.

 

Once she pays taxes on her gain from this sale, she may give the money to you and your wife as a gift to use in any manner you wish. The only requirement would be that she file Form 709 with the IRS to report the value of the gift.

 

First, if and when gift tax is ever due, it is paid by the donor and not by the recipient of the gift. However, under current regulations, each taxpayer is allowed to give gifts in their lifetime of up to $1 million before any gift tax becomes due.

 

In addition to the $1 million lifetime exemption, each individual is allowed to give annual gifts of up to $13,000 to any number of individuals, and those gifts do not even apply towards the lifetime exemption, nor do they need to be reported. Gifts which exceed the annual exclusion of $13,000 must be reported by the donor by filing Form 709 with the IRS to report the value of the gift. However, no tax is actually due unless that donor has already reached his $1 million lifetime limit. The amount reported then reduces that donor's remaining lifetime balance that he may give in non-taxable gifts.

 

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

 

Thank you

 

 

Customer: replied 3 years ago.

My mother-in-law has had the apartment for 40 years. After the fall of the Soviet Union, ownership of the apartment was transferred from the state to her. She paid nothing for the apartment.

 

Additionally, I thought everyone was due a one-time capital gains exemption on proceeds gained from the sale of a home? Would she need to purchase a home jointly with us to "rollover" the proceeds and claim the one-time exemption?

 

What if the funds were wired directly to our lender? What reporting requirements does the lender (and us) have to the IRS? Tennessee has no state income tax.

Expert:  Merlo replied 3 years ago.

Hello again JA Customer,

 

Many years ago the IRS used to allow taxpayers who sold their primary residence either a one time exemption on paying tax on the sale or they could reinvest the money in to another primary residence and defer the tax. Those rules changed many years ago.

 

The new rules allow a taxpayer who sells their primary residence to exclude the first $250,000 they have in gains from being taxable. But in order for the property to be considered the taxpayer's primary residence, the taxpayer must have owned the property for at least 2 years and also must have lived in that home for at least 2 of the last 5 years preceding the sale.

 

You said that your mother in law lives with you here in the United States, so I just assumed that she does not meet the rule of having lived in this home for 2 of the last 5 years. If she does meet that rule, then she could exclude her first $250,000 from being taxable. Basically she cannot have moved out of the house more than 3 years prior to the date she sells it in order to qualify for this exclusion.

 

That is the only possible exception to taxes that your mother in law will owe. It does not matter if she has the money transferred to you or to your lender or anyone else.

 

It will strictly be your mother's responsibility to report this sale on her own tax return. It is not your responsibility or anyone else's responsibility to report this sale or to report receipt of this money.

 

 

Thank you

 

 

Customer: replied 3 years ago.

This will be my last question. I'm sorry to be so pesky, but I've contacted several CPAs in my area and they won't return phone calls.

 

My mother-in-law was claimed as a dependent on my 2009 tax return. If she files independently of my return in 2010, will that raise an audit flag with the IRS? If I claim her as a dependent in 2010 ( she would have been in our home for about 6 months this year) won't the proceeds from the sale of her home be counted as my income since she would be claimed as a dependent... or is that only in the case of minor children?

 

Also, she just received her Green Card last May, 2010 and hasn't officially moved to the US... she was with us from May of 2009 to May, 2010... all the time in last 5 years has been at her apartment.

 

Thanks, Greg

Expert:  Merlo replied 3 years ago.

Hello again Greg,

 

First, if your mother in law lived in the apartment in Russia all the way up until May of 2009, then as long as she sells that apartment by May of 2012, she will satisfy the rule to claim this as her primary residence, because she will still have lived in the home for at least 2 of the last 5 years preceding the sale. That being the case, her first $250,000 in gains is not taxed. Since the sales proceeds will only be around $150,000, she is well below the exclusion amount and would not owe any taxes on this transaction, and in fact, she will not even be required to report the sale on a tax return.

 

As far as you claiming your mother in law as your dependent, please understand that when you claim someone as a dependent, that does not mean that any income they have for the year is counted as your income for tax purposes. The income still remains the income of the dependent, and if they need to, they file their own separate tax return. The only difference would be that if they need to file their own tax return, they do not claim an exemption for their own personal allowance Instead, they just check the box on line 6 of Form 1040 which says they can be claimed as a dependent on someone else's return. So claiming your mother in law as a dependent does not mean that you become responsible for reporting her income as your own income.

 

Even in the case of minor children, the income of the children is not treated as income of the parents. There are some special rules regarding investment income received by minor children. If minor children receive over a certain amount of investment income, then the income is still considered to be income of the children, but it is taxed at the higher rate which applies to the parents. This is to prevent parents from shifting their investments in to the names of their children in hopes of paying a lower tax rate. But this would certainly not apply in the case of you claiming your mother in law as your dependent.

 

BotXXXXX XXXXXne here is that since this does qualify to be her permanent residence, she will not owe any taxes on the sale and she does not have to file a tax return to report the sale. You can continue to claim her as a dependent on your own return as long as you continue to meet the rules to do so.

 

 

Thank you Greg

 

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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