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taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 485
Experience:  Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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If my grandmother bought me a house in 1999 by paying cash

Customer Question

If my grandmother bought me a house in 1999 by paying cash for it and recording the loan against the house of 245,000 and then lent me another 100,000 to make repairs also recorded against the property passes away and leaves the house to me outright and forgiving me of all loans, will I have to pay any type of inheritance taxes on it if I need to sell it because its gone up in value and my taxes are 5000 a year now, which I cannot afford to pay on the 1500.00 I get from the estate each month.
Submitted: 22 days ago.
Category: Tax
Expert:  taxmanrog replied 22 days ago.

Welcome to Just Answer! Thank you for giving me the opportunity to assist you! I will do my best to help!

My condolences on the passing of your grandmother. Unfortunately, this is not a good tax situation. The forgiveness of the $345k of debt is considered cancellation of debt (COD) income, and is taxable on your income tax return. There is an exception for qualified personal residences (Internal Revenue Code §108(a)(1(E)), but the exclusion only applies to the extent that the forgiveness was the result of a workout that was triggered by a decline in the fair market value of the residence or a deterioration in the debtor's financial condition (IRC §108(h)(3)). This forgiveness was triggered by your grandmother's death, so this exclusion would not apply. Had your grandmother forgiven an amount of debt equal to the annual tax-free gift exclusion amount (currently $14k per year), the amount of the mortgage would be significantly less, below $100k, which would mean that the COD income would be under this amount. If you made any mortgage payments to her, this would further reduce the amount of COD income.

The good news is that you do not pay any inheritance tax on the receipt of the house. The decedent is the one who pays the estate tax.

The other good news is that if you were to sell the house, you could exclude up to $250k of gain ($500k if you are married, filing jointly) as long as the house was your principal residence for more than 2 of the immediate 5 prior years. Unfortunately, you do not get a "step-up" in basis at the time of your grandmother's death, since the title to the house was already in your name.

While I know this was not a good answer, it is the correct one. I hope this answers your question. If you have any more, please let me know, and I will be happy to respond!

Thanks! Have a great weekend!

Customer: replied 22 days ago.
Or a deterioration in the debtor's financial condition (IRC §108(h)(3)). I got sick in 2012 with Hep c while working as a dental hygienist and due to many illnesses and hospitalizations I have only returned to work for a period of 33 days since this time and I had not worked long enough to qualify for ssi so I could not make the payment and she was not going to put me on the street. I am now considered to be disabled and unable to work at any job due to the many work restrictions and time off I would need to take each month for medical care exceeding 2 days a month. Due to the way she did the trust fund with me getting the 1500 a month I am not qualified to get the other ssi either. Unfortunatly, I cannot afford to pay the taxes on the house and the trustee just ran off with all of the money in the trust so I am living on the 1500 a month which is income from apartments the trust owns in las vegas. This is why I was thinking of selling the property. Fortunatly , I just recieved another tax bill and they have implemented the property tax postponement program again so going forward I may not have to come up with them. If I can find the 5,000 plus penalties and interest I owe for last year somehow between now and 4 years from now I guess I could stay in the house. I currently do not even file income taxes because I dont think I make enough to pay any so are you saying that as long as I stay in the house I wont have to pay these taxes or am i supposed to pay now?
Expert:  taxmanrog replied 22 days ago.

Your medical condition and your inability to work would lead to a determination of deterioration of your financial condition. This appears to have happened while your grandmother was still alive, so her not demanding payments or foreclosure would indicate that she was forgiving the debt through a workout program. This would mean that you would not have COD income.

Also, as the house is your principal residence you would not pay tax on the first $250k of gain if you sold it. You would not have to report or pay any tax on this until you sold the house.

As far as not filing any tax return, I do not know how the trust is set up, but if it is paying you $18,000 per year ($1,500 per month) you should probably be filing a tax return. Most trusts pay out income and sometimes principal to the beneficiaries, and they pay the tax on the income portion. Some trusts (in the minority) pay the tax themselves and the beneficiaries do not pay the tax. These are in the minority, as the tax on a trust is usually at a higher rate than on a beneficiary.

I hope this helps! Please let me know if you have any more questions.



Customer: replied 22 days ago.
I get all of the interest income and I was supposed to be getting 500.00 a month from the principal however as I mentioned the trustee as used lol of the principal up illegally which I haven't done anything about because I'm afraid the next trustee will have to be appointed because I don't have I trust and being these apartments are in Nevada I'm sure the trustee will get a property management xompmy into run them and this will leave me with less money than she is giving me now. It does state in the trust that all of the taxes are to be paid by the trust and the first trustee told me I did not need to worry about it. Can you give me a ball park estimate in how much money in taxes I will have to pay if I sold the for the Zillow estimate 623,726 today?
Expert:  taxmanrog replied 21 days ago.

If you get $1500 per month, and $500 is supposed to be principal, then you are receiving $1000 per month, or $12k per year of interest income. You should be filing a tax return. Check with the bank holding the trust to see if the trust is paying the tax. IT would be better for you to pay it, because it seems like you would be in a low tax bracket.

Have you made any improvements to the house over and above the $100k that your grandmother paid for? Did you make any downpayment on the purchase? Or did your grandmother finance 100% of it? If you paid $345k for the house, your basis is $345k, less the amount of debt forgiven. If you did not make any improvements to the house, and your basis is the $345k, and you never made any payments on the mortgage and your grandmother did not gift you your annual amount, your basis is $345k cost less $345k debt forgiven, for $0 basis. If you sold the house for the $623,726, less the $250k principal residence exclusion, your gain would be $373,726. Long Term Capital Gains are taxed at 15%, so your tax bill would be $56,059 from this transaction. Your actual tax bill might be more or less, depending on if you had any other income.

Did your grandmother by any chance gift you the $14k per year that is allowed without filing any paperwork? If she did, for example, your gifts would have reduced the debt by $210k. If the original mortgage balance were $345k, less the $210k of gifted payments, the COD would be only $135k. Your basis would be $345k - $135k debt forgiven = $210k. If you sold it for $624k, less the $210k basis, less the $250k principal residence exclusion, your gain would only be $164k. Tax on this at 15% is $24,600.

Any other payments to your grandmother, or any improvements that you made, would reduce this gain.

I hope this helps! Please let me know if you have any more questions.



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