My wife and I partnered with her mother to purchase a home for her to live in in 2006. Her mother can no longer live by herself and we cannot afford to pay the mortgage. We are in a short sale process, but we fear that the tax impact on us (my wife and I) would be more detrimental than if we let it go into foreclosure. I was advised that the government is forgiving the "gift" provisions in a short sale. However, our tax adviser informed us that since we did not live in the house, we would not be eligible for the gift forgiveness. The question is whether we would be able to get a gift foregiveness for tax purposes.
Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.
When you say "partnered" what do you mean? Does your mother-in-law have an ownership interest in the house.
At the time my father in law and mother in law were living in Cleveland. My wife and I live in California and my wife convinced them to move closer to us so she could watch over them. I offered to pay have the deposit and haft the mortgage to make it affordable for them. My father in law passed away in 2008. My mother in law is 82 and can no longer live by herself. She has actually moved into an independant living facilty and the house has been vacant since January. I could no longer afford to make my portion of the payment and since she is paying the new facility, she can no longer make her payment. The mortgage has been in arrears since about April. However, we are in a short sale process but the bank now wants us to sign a counter offer. My wife believes we would be hit with a tax liability because the balance on the mortgage is about 235,000 and the counter offer would bring the purchase price up to 212,500. That shortfall is where the gift provisions would occur.
Half the deposit and and half the mortgage payment
The question is "Does your mother-in-law have an ownership interest in the property?
Yes, she and my father in law; and my wife and I are listed owners.
Well whatever her interest is in the house (50% ?) would be exempt from any tax on debt forgiveness as it was your mother-in-law's principal residence for at least 2 out of 5 years ending on the date of sale.
The questions is whether my wife and I will be subjected to a tax liability?
So that cuts any gain in half and the only way that you could avoid that would be if you were insolvent on the date of the debt forgiveness.
What does insolvement mean - bankrupt? Sounds like we will have a tax liability, right?
Based upon your numbers you would have taxable income of approximately $11,000.
Would we be able to claim a loss if we went to foreclosure?
How would you have a loss?
We paid $325,000 for the house with a $65,000 down payment. that downpayment would be a loss.
It was my business investment, since I wasn't living in the house.
Unfortunately losses aren't deductible on personal use property. Since you were dealing with your wife's parents, that is considered the same as if you were using the property yourself.
Then why wouldn't I/we also be foregiven on the shortfall?
Because it only applies to your primary, principal residence.