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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34348
Experience:  Retired (mostly)
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Hello, Please can you let me know the tax implications if

Customer Question

Hello,
Please can you let me know the tax implications if I do the following. Thanks Ram

Accept Investment in your Primary Residence

A) Accept 12.5% investment, part of my primary home equity as an investment option, in exchange for proportional future growth. The money is NOT a debt but an investment option.
Is the money ($85,000) I received taxable?
e.g: Appraised Primary Residence SFR: $680,000
Mortgage balance: $450,000
Equity: $230,000
Investment: $ 85,000 = 12.5%

B) Investment period can be up to 30 years. To free primary Residence of the investment option, I have to repay investment amount ($85,000) + any RE proportional Growth/decline.
eg: Proportional growth/decline Calculations:
Appraised Primary Residence value: $680,000
RE Growth assumption: 6%
Cost of Investment option in 10 years = $268,888
Cost of Investment option in 30 years = $1,612,787
RE Decline: -2%
Cost of Investment option in 10 years = -$62,1955

Adjusted purchase of Primary residence = Original Purchase price + Cost of investor option.
Will adjusted purchase price be used for my capital Gains tax?

Will this adjusted purchase price + Home Sale Exemption be used to calculate capital gains:
i) Sell Primary Residence when the investor option is paid
ii) Sell Primary residence at a date after paying investor option?
Submitted: 1 year ago.
Category: Tax
Expert:  Angela--Mod replied 1 year ago.

Hello, I'm a moderator for this topic. I've been working hard to find a professional to assist you right away, but sometimes finding the right professional can take a little longer than expected.

I wonder whether you're ok with continuing to wait for an answer. Please let me know and I will assist further. Thank you!

 

Best,

Angela

Customer: replied 1 year ago.

Hi Angela,


 


I can wait till tomorrow for an answer. However, please can you let me know if someone was assigned today, else I may have to find someone else.


 


- I would like to elaborate (B) part of my question.


 


I was asking, what would be growth income for which I need to pay capital gains.


 


e.g: 10 years growth is $268,888 X 2 = $537,776.


a) SELL the house: If I paid the investor $268,888. Then, will my capital gains tax be on $ 537,776 or $ 268,888, when I sell the house.


b) SETTLE Investor without selling the house: Will my capital gains tax when I sell the house IN THE FUTURE, be $537,776 or $268,888.


 


Thanks


 


Ram


 


XXX-XXX-XXXX cell


 


 


 


 


 


 

Expert:  Angela--Mod replied 1 year ago.
Thank you for your patience while we search for a professional to assist you.

Expert:  socrateaser replied 1 year ago.
Hello,

Complicated stuff. You asked:

A) Accept 12.5% investment, part of my primary home equity as an investment option, in exchange for proportional future growth. The money is NOT a debt but an investment option.
Is the money ($85,000) I received taxable?
e.g: Appraised Primary Residence SFR: $680,000
Mortgage balance: $450,000
Equity: $230,000
Investment: $ 85,000 = 12.5%


A: A "gain" means that the value of a taxpayer's investment has increased in value. Whether or not you have a taxable gain on the $85,000 depends on the proportionate difference between the adjusted basis of the property on acquisition and the value on the date of the "investment."

Let's say that your property was worth $580,000 when you purchased and $680,000 on the date of investment. That's a 17% gain. Which means that 17% of $85,000 = $14,655 is taxable income to you.

If you think of the investment as being 100% of your property's value, and you would be relinquishing all right, title and interest to the investor on the date of the investment, it would be no different than a sale of the property. You would incur a gain, and it would be taxable, unless protected by the gain on sale of taxpayer's principal residence exemption. IRC 121.

Now, there is one little catch to all of this. Unless the investor is actually receiving a deed making the investor a tenant in common in the property with a proportionate interest in the property, then your proposed transaction is nothing more than a disguised loan with a variable return, based upon the property's value on the date of sale or repayment. The reason for this is that without the proportionate interest, the principal payment is secured by a deed of trust, there is a maximum repayment period, and a variable rate return. In short, everything about the transaction is exactly the same as a loan, except that there is only one payment, and the interest rate is undetermined until the date of sale.

I was asking, what would be growth income for which I need to pay capital gains. e.g: 10 years growth is $268,888 X 2 = $537,776.

a) SELL the house: If I paid the investor $268,888. Then, will my capital gains tax be on $ 537,776 or $ 268,888, when I sell the house.

 

A: The capital gain is on your share of the property. The investor is taxed on its proportionate gain.


b) SETTLE Investor without selling the house: Will my capital gains tax when I sell the house IN THE FUTURE, be $537,776 or $268,888.

 

A: When you receive the $85,000, you have "sold" a proportionate share of the property to the investor. When, you pay the investor back, you are repurchasing that proportionate share. There is no gain on a purchase, and so no tax on that portion of your payment. If you don't sell your share of the property, then you would have no gain at all.

 

Moreover, if you satisfy the IRC 121 exemption requirements (2 years occupancy as principal residence on the date of the $85,000 investment), you would only have a gain if you exceed the $250,000 exemption (reduced to the proportion of the property sold -- which in my example would be 17% X 250,000 = $43,103 -- meaning that you would have no taxable gain, because it would be covered by your proportionate tax exemption).

 

Hope this helps.

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34348
Experience: Retired (mostly)
socrateaser and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Hello,


 


I was reading your response again and again. I seem to understand but was not comfortable as I felt I was missing your explanation. Only today, did I understand the tax implication of 85,000. Now I see it is fully taxable as my purchase price was 200,000. Thanks for sending a detailed reply. You saved me from making this blunder.


 


I am sending you $25 bonus as my appreciation. Thank you again. Ram

Expert:  socrateaser replied 1 year ago.
I'm flattered, and I thank you for your contribution -- so that I can continue to help you and others in the future. Best wishes.

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