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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I need advise on a quick deed loan and selling the house, taxes

Resolved Question:

I need advise on a quick deed loan and selling the house, taxes etc.
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.
Hello bonehead,

1. Are you the one who was listed as the owner when the home was sold?

2. If you were still listed as the owner, how long had your name been listed as an owner, and did you live in the house yourself as your main home for at least 2 of the 5 years preceeding the sale?

3. What did your friend originally pay for the home?

Customer: replied 8 years ago.
I was listed as the owner. My name was listed for 3 years I did not live in the house but I had furniture and what not in it as I work for the militarty and travel a lot. My friend paid 50K for the house.
Expert:  Merlo replied 8 years ago.
Hello again bonehead,

The reason I asked if you had lived in the home, is that the IRS allows an exclusion of up to $250,000 on the sale of your primary home when you sell it, but in order to qualify for that, you must have lived in the home for at least 2 of the last 5 years preceeding the sale.   Since this does not apply to you, then you will owe capital gains tax on the gain you had from the sale.

Since your friend basically gifted you this property, you retain the same basis as your friend's at the time the gift was given. Your friend's basis would have been the $50,000 that he originally paid for the home, plus the cost of any capital improvements that he made over the years that he owned it. So as an example, if he put on a new roof and added a new A/C unit and new furnace and made total improvements of say $10,000, then his basis would be $60,000 total. That same basis passes on to you when he gifted you the home. You do not go by the current market value of the home at the time he gave you the property.

To figure the gain you had from the sale, you take the selling price less your basis. So if the selling price was $322,500 and your basis was $60,000, then you had a gain of $262,500. You would be liable for long term capital gains tax on that gain, and that tax rate is currently capped at 15%. So your federal tax on that sale would be approximately $39,375. You would also owe state tax to Utah at a rate of 5% for a total of approximately $13,125.

You mentioned in your post something about gift tax, however, this probably will not apply. Under current law, every individual is allowed to give gifts of up to $1 million in their lifetime before any tax is due. Unless your friend had already given away this much in gifts, then no tax would be due. He would, however, be required to report the gift by filing Form 709 with the IRS. There is no tax due with the form, but it is a reporting requirement. The value of the gift given then reduces his $1 million lifetime limit.

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Thank you bonehead, and please let me know if you need any further clariifcations on this.

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