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Tax-Scholar
Tax-Scholar, CPA
Category: Tax
Satisfied Customers: 89
Experience:  Helping customers comply with and plan for income taxes
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I have a question regarding capital gains and if I will have

Customer Question

Hello,
I have a question regarding capital gains and if I will have to pay them.
In November 2015 my mother signed over her home to me (I believe it was with a quit claim deed with wording that said I was buying it for $10). The house is fully paid for. The reason we did this is because my father died in August 2015 and my mother was needing to be placed in a home due to her dementia. We were applying for VA Aid & Attendance for my mom, but in order to qualify she could not have the house in her name. My parents have owned and lived in the home since 1960. They originally paid about $25,000 for it.
The plan was for me to sell the house once it was put in my name and use the money to pay for my mother's care. Fortunately we just received an offer of $170,000 for the house, but my husband just mentioned we may have to pay capital gains. I have 4 days to accept this offer, and we are in desperate need of money from the house sale to continue to pay for my mom's care in the memory care home she is now in. My husband & I both receive social security only- we have no other income. But if I have to pay a huge amount with capital gains I won't have enough money to pay for care for my mom until her death!
Are there any options to avoid paying capital gains? It is a very remote possibility that my mother could live with my daughter for awhile, but eventually she would need placement again when the dementia worsens (ie. for safety issues). I could hold on to the house, but it would not be my primary residence, and if I kept it I would really need to rent it in order to have enough funds to pay for my mother's care.
I'm praying you can answer this question quickly, and provide as many scenarios as possible to help me make the best decision. We are located in Tucson, Arizona (so is the home).
Thank you for your time.
JS
Submitted: 9 months ago.
Category: Tax
Expert:  Tax-Scholar replied 9 months ago.

Hello JoAnne - Generally there is an exclusion up to $250,000 (or 500,000 for joint filers) on the sale of their primary residence. However it does not sound like you have made this home your primary residence and therefore would not qualify. A primary residence for tax is a home that has been your primary residence two out of the last five years. If the market is strong then I suspect there will be other other offers. You should try to live in it for two year. If you mother sold the house then she might be entitled to these benefit. However because of the deed then you must qualify.

Expert:  Tax-Scholar replied 9 months ago.

The capital gain rate is anywhere from 15-20%

Customer: replied 9 months ago.
Thank you for your quick reply.It seems there really is no way around the capital gains tax if I accept the offer on the home and sell it..? My mother's estate attorney had us put the house in my name, knowing that we would be selling it right away, because of the VA Aid & Attendance eligibility and also for Medicaid eligibility, since my mother will need it in the future.If we put the house back in my mother's name right away, and she sold the house to this prospective buyer, would my mother have to pay the capital gains tax since she would only (technically) own the house for a day or two? Or is there any way that her previously owning & occupying the home for the last 55 years be enough to avoid capital gains?Also, if I kept the house for two years would I definitely HAVE to live in it myself? I already have a home and living in this home is not ideal. Is it possible to rent the home for the two years, or would that mean it is no longer MY primary residence?Lastly, I see you said the capital gain rate is 15%-20%..Can you tell me how this is determined? I figured the profit of the home ($170,000) would be added to my husband's and my income, which being on social security would put us just over $200,000. And then I thought that would put us in a 28% or so tax bracket.We were never told about capital gains before putting the house in my name and it is so upsetting to be finding out about all this now!Thank you,
JoAnne
Customer: replied 9 months ago.
I think my daughter, Michelle may be communicating about this for me....as I am pretty upset by this. Believe she was going to ask if there is a benefit to signing the home back to my Mom..... and also how can it be that one federal agency considers the house gifted to me? (Medicaid) and the other one, IRS...considers that I bought it? And why did this not happen to my husband when his mother died and they had to sell her house? It was just considered an inheritance and there were no taxes on anything...not even the $50,000 cash he received? The difference is one is alive and I am now totally responsible for her so I have to lose all this money that is needed for her care....and the other....my MIL died and made it all very easy to deal with......apparently.
Expert:  Tax-Scholar replied 9 months ago.

For tax purposes you could deed this property back over to your mother and have her sell. The home should be considered her primary residence if she meets the two out of five year test. A brief lapse in ownership should not be an issue. If you keep the home in your name then yes would have have to actually live in the house. Cap gains are taxed at preferential rates. The 28% comes from the ordinary income bracket. If you rent the house out it becomes a business asset and the gain would be called 1250 Gain and taxed at 25% if it was sold later.

Customer: replied 9 months ago.
Just for your info about this....Eldercare attorney says no capital gains taxes would be due because the house was in a trust and AZ is a community property state, so the basis would be what the house was worth on the day my Dad died...which was August 10th. He went to Zillow and looked that up, and Zillow had rated the house as worth $217,000 on that date. Apparently, at death, the trust is dissolved and the issue of community property changes, and now Mom is the sole owner at that point...so that's where they get the figure to work from for capital gains. So, I am selling the house for $170,000 and that will mean it's a loss that we put on our taxes. Now I have no idea what it means on taxes to have a loss to declare? Can you answer that one for me at some point here?
Expert:  Tax-Scholar replied 9 months ago.

Hello JoAnne - Yes that additional information is helpful. At death property transfers to the heirs at Fair Market Value. A capital loss is not allowed on personal assets like the sale of a residence. Instead the property must be held for the production of income. You could rent the house out for a year and then sell it for a capital loss.

Expert:  Tax-Scholar replied 9 months ago.

Additionally capital losses can only offset capital gain or up to $3,000 of ordinary income a year. So if you were to sell it for a 47,000 loss it would take 15 years to realize this loss absent other capital gains.

Customer: replied 9 months ago.
Thank you very much. Now I understand and am just reassured that I won'the have to pay any taxes. I think I can take it from here. JoAnne
Expert:  Tax-Scholar replied 9 months ago.

Thanks JoAnne for using Just Answers. Let us know if we can be of any help in the future.

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