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# I am purchasing a house from my parents. They paid 19,500

I am purchasing a house from my parents. They paid 19,500 for it 30 years ago. What would be the difference in taxes due to capital gain? If we made a purchase agreement and instead of making it for 65,000 they gave me a gift of equity bringing the total to 81,500?
Thank you
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7/30/2013
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 56,027
Experience: 29 years of experience as a tax, real estate, and business attorney.
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Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning. Is this your parents principal residence...i.e., has it been there personal residence for at least 2 years out of the preceding 5 years? Also, what is the fair market value of the house? And, can you tell me what the \$65,000 and \$81,500 amounts are based upon? Thanks.
Customer reply replied 4 years ago

No my parents have never lived in the house. Fair market value 85,000 is what we pay taxes on. \$65,000.00 is the amount I am going to pay my parents for the house. The \$81,500.00 would be the \$65,000.00 plus a gift of equity of \$16,500.00 for the down payment.

Thanks

Thanks so much for your response.

But, the capital gains tax for your parents will vary depending upon whether or not you choose Option A or Option B.

Option A: Your parents give you the \$16,500 and then you buy the property for \$81,500. In this case, your parents would pay capital gain tax on the difference between \$81,500 and their basis of \$19,500..i.e., they would have long term capital gain of \$62,000.

Option B: You structure this as part gift/part sale where you agree to buy it for \$65,000. Your parents would be deemed to have made a gift of the \$16,500 in value of the property and they would pay capital gain tax on the difference between \$65,000 and their remaining basis of approximately \$15,000 (it's reduced by the approximately 20% of their basis that carried over to you for the portion gifted)(I'm rounding for the purposes of illustration). ...i.e., they would have long term capital gain of approximately \$50,000.

For 2013, the tax laws concerning taxation of long term capital gains are as follows:

0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.

In addition, starting in 2013, capital gain income will be subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of \$200,000 for single filers and \$250,000 for married couples filing jointly

Customer reply replied 4 years ago

Hi ,

I am new at this and the answer is fairly technical. Basically what I am trying to do is create an atmosphere where my parents have less taxes to pay and I could use the help with not paying a down payment. Could you advise me on the best route? My father is retired but my Mother still works. they are just having a tough time and if they can get more from this house legally of course. It would help pay for their house. I would appreciate any guidance you could offer. Thank you

Thanks for following up on this. Your best bet here is to buy the house for the \$65,000. That will create the lowest capital gain for them. The difference between the fair market value of the house and the \$65,000 will be considered a gift, but will not be taxable to either you or them. :)
Customer reply replied 4 years ago

I don't understand. I thought they would get a break on the gifted part. I was going to pay the difference in taxes over the \$65,000.00.

They do get a break. If they sell the property for \$65,000, no one owes any gift taxes or capital gains taxes on the value in excess of the \$65,000. So, not only do you not owe any taxes on the value over \$65,000, neither do they. They would not be entitled to any deduction for a gift because a gift, though not taxable, is not a deduction for purposes of capital gain tax or income tax.
Customer reply replied 4 years ago

So if they sell the house for \$65,000.00 even though they paid \$19,500.00 for it. There will be no capital gains tax? Because H&R Block had told my Mom there would be.

They will have capital gains tax on the gain...i.e., the \$65,000 less the \$19,500. BUT, they will not pay capital gains tax on the fair market value amount in excess of the \$65,000.
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 56,027
Experience: 29 years of experience as a tax, real estate, and business attorney.
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