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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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My grandparents have $450K in mortgage/heloc debt spread across

Customer Question

My grandparents have $450K in mortgage/heloc debt spread across two properties. They have a third rental property worth about $450K which they have recently paid off in order to do a self financing deal on a sale. So they essentially transferred the debt from a rental property to their primary residence. Because of their age a long term self financing deal does not make a lot of sense, so I am wondering if they are just creating $100K tax burden for themselves by moving all their debt to the primary residence, which the only place they will not pay income tax on a sale. Can they move the debt back to the rental property before the sale to avoid paying income tax on the full $450K? If so, is there any period of time that the mortgage must be established before they can sell?
Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Good afternoon. My name is ***** ***** I look forward to helping you. The debt will not impact the tax liability. Tax liability on a sale is based on the gain on sale and gain on sale is calculated based on: i) sale price (less closing costs), reduced by ii) the basis of the property. The basis of the property is the cost of the property plus the cost of any improvements less depreciation in the case of rental property. Whether any of these costs are paid with cash or by debt is not relevant; thus, basis is not impacted by debt and thus does not factor into the calculation of gain on sale.

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