capital gains tax?

Question

buying a house from my mother in law and plan to pay capital gains for her. i have no idea what it will be. she bought it in like 1960 and she is 71 years old now, don't know if she is exempt or not. she hasn't lived in the house in several years.

Answer 1

Both Tax Men hit this one on the head. I would only add that talking to a CPA prior to purchasing the home might be a good idea. There might be some other issues that we have not seen.

If you live in a state that requires title insurance (like FL) you can use a lawyer for your title insurance and to close on the property and they will likely give you tax advice for free (since you are already forking over money for the closing costs). Just make sure that the lawyer passed the CPA exam or specializes in both Tax and Real Estate.

The other thing that I would add is that you calculate the adjusted base in the following format:

Cost of the home
Plus Improvements NOT SIMPLE REPAIRS (i.e. maintenance)
Minus Depreciation (if the house was ever rented out, not so in your case)

The exclusion is just as it is mentioned in both of the Tax Men's answer. You have to look into the death of your father-in-law because that can save you a boat load (however, for real, sorry for her loss; we accountants try not to forget our feelings too!)

If you have any questions, please feel free to email me or the Tax Men!

Good Luck!

Answer 2

If your mother-in-law lived in the house for 24 months out of the past 5 years, she can exclude $250,000 of the capital gain. If the property was community property (i.e. in a state with community property laws) and her husband recently died, her basis in the house for tax purposes would have been stepped up to the value at that time, in which case, she may have very little taxable gain.

If her gain is considerably more than the exclusion, consider other alternatives. For instance, you can rent the house from her which will give her money. When she dies, you can buy the house from her estate (or she can leave it to you in her will). In either case, you will receive the house with a basis equal to its worth at that time and she pays no capital gains tax. Avoid having the house gifted to you as you will only receive a basis equal to what she paid for it. I am assuming that her estate will be under the limit for the inheritance tax.

Answer 3

The answer is real easy if you are paying less than $250,000 for the house and she can claim the exemption. If both are true, she doesn't have any capital gains tax.

Capital Gains exemption - if she owned the house for any 2 of the last 5 years and lived in the house for any 2 of the last 5 years, she does not have to pay capital gains taxes on the first $250,000 of gain ($500,000 if she is married). So, if she moved out less than 3 years ago, she is fine. If she moved into a nursing home in the last 4 years, she is also fine. However, if she moved out of the home more than 4 years ago, the exemption may be limited depending on why she moved out. And finally, if she moved out more than 5 years ago, there is no way to claim the exemption.

So, if she went into a nursing home or equivalent less then 4 years ago, or moved out normally less then 3 years ago, and you are paying less then $250,000 more than she paid for the house originally plus improvements, there will be no capital gains tax. Otherwise, there will be capital gains. Look at other people's answers to figure out how to calculate it, but it is essentially 15% of what you pay for the house minus what she paid minus what was paid over the years for improvements that are still there (can't write off a swimming pool that no longer exists for example) minus closing costs minus purchasing costs minus any exemption she may be entitled to (see previous paragraph).

(Additional information I thought of on my drive home)

There are lot of important things we don't know about her to give a good answer, but one of them is her income. If she is not working and her only income is social security, some of that gain won't be taxed. Why not? Because just like when you do taxes, there are things you subtract out before figuring your taxable income like the standard deduction (at least $5000) and, if she can claim herself, her personal exemption ($3200).

Don't blame us tax people or even the IRS for all of these complications...blame congress. They make all of the tax laws. Ultimately, you should wait for her to do her taxes next year and repeat the process without the house. Then, just pay her the difference. It is more than $11,000, there may be a gift tax involved, so consult a tax person first. You may need to pay her over the course of more than one year to avoid this tax. (again, blame congress)

Answer 4

The cap gains will be 15% on any amount over the $250,000 exemption. Cost basis is the key find out what she paid for it, what repairs she has done these can impact cost basis.
If she is looking to release this equity and is over the $250,000 exemption take the number and multiply by .15 you will be surprised at the amount. But put in perspective its family....

Answer 5

She will owe capital gains tax if she sells it to you. If she gives it to you, she doesn't (and is "exempt") or if she uses the money to buy another house, she may be "exempt" (the capital gains will just be deferred until she sells the "new" house), but they'll eventually have to be paid.

Look up the county records in the property office, it'll tell you how much it was bought for.

Answer 6

There is no capital gains on a house owned more than five years unless you use it as rental property or business since it is her primary residence.