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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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I'm selling my house to my son and his wife, and planning on

Customer Question

I'm selling my house to my son and his wife, and planning on gifting the equity of 20% so they can get a loan for the balance. gift will be sale price $440,000; equity gift $88,000 ; new loan $352,000. Do I have to pay taxes on $88,000? original purchase price $370,000.
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: bought the house in 2005 for 370K, original loan amt was $298K. My son & wife have been renting the house since. I have included this as a rental in my tax returns.
Submitted: 11 months ago.
Category: Tax
Expert:  ABC Accounting Group replied 11 months ago.

Hi. Great Question. You can gift it with no taxes to you - since it is over $14,000, you will have to fill out a gift tax return, but will have not tax due, since it is under the 5+ million of estate tax lifetime exclusion.

Expert:  ABC Accounting Group replied 11 months ago.

You can also take the 250k/500k gains exclusion if you can prove ownership and use of home.

Ownership and use of that home does not need to occur at the same time. As long as you have at least two years of ownership and two years of use (you occupied the house) during the five years before you sell the home - also, the ownership and use can occur at different times.

One question - have you been filing a Schedule E or taking the rent as other income on the 1040?

Customer: replied 11 months ago.
I file Sch E each year.
Customer: replied 11 months ago.
Bought the house for $370, spent around $30K for upgrading. loan balance is now 317K. $35K will be proceeds to me i.e. the difference between the loan amount of $352K and pay off of the loan$317K. What happens to the $30K expense incurred? Can I show this somewhere in my return?
Expert:  ABC Accounting Group replied 11 months ago.

From this, you received a net of 352k, which was under the 370k - since it was a rental property, you would have to add back the depreciation you had taken on the property via your prior Schedule E's - if the net of this calculation is a gain, subtract any closing costs or other sales costs you had from it.

Two transactions

- the 88k would be part of the lifetime estate exclusion - a gift tax return would be filed, since it is over 14k (28k, if jointly).

- the net would either be classified as a capital gains or loss for the year of sale (adding back any depreciation expense taken/less selling/closing expenses)

Expert:  ABC Accounting Group replied 11 months ago.

Let me know if you have any questions.

Customer: replied 11 months ago.
if adding back the depreciation expense goes over $370K, then this becomes capital gains which I will have to pay taxes on, this year? by the way, not sure if it matters, but the property is in California.
Expert:  ABC Accounting Group replied 11 months ago.

California has a common law property, but does not pertain to recognizing the capital gain or loss. Remember to add back the closing costs and any selling costs you pay for - this may lower or write off the gain.

Customer: replied 11 months ago.
huh? what do you mean community property?
Expert:  ABC Accounting Group replied 11 months ago.

Community property relates to ownership rules - it relates to for example if a spouse dies and there is a capital loss carryover on the joint return - the wife or husband can take 50% of that loss off on their future returns - it is a legal concept that overlaps with tax. I was answering anything related to California. Sorry for the confusion.

Customer: replied 11 months ago.
I understand that the max I can gift to a couple a year is $28K. If my gift is 88K, does it mean I will have to pay capital gains taxes on the $60K difference? Since net proceeds of $352K is less than the original purchase price of $370K, Can I take the diff of $18K and deduct this from the $60K to reduce capital gains to $42k?