capital gains tax real estate? This is in california?

Question

I have a friend who is buying a house from an elderly lady.
He will pay a little over what she owes on it (750K)
What are her tax consequences?

Answer 1

Her tax consequences probably won't be much if anything, if he's just paying a little over what she owes on it.

Answer 2

What she owes on it isn't a factor. Her tax consequences will depend upon her cost basis, the sales price, and how long she has lived in it as her principal residence.

If she lived in it for at least 2 of the 5 years immediately prior to the sale, she can exclude up to $250,000 of gain from taxation. If her gain exceeds that, the excess would be taxed at the lower long-term capital gains rate, normally 15%.

If she does not meet the criteria for exclusion, her tax consequences depend upon how long she owned it. If she owned it for more than one year, it's taxable at the long-term capital gains rate as noted above. If she owned it for one year or less, the entire gain is taxable as ordinary income at her marginal rate.

As I said, any outstanding mortgatge balance does NOT figure into the gain calculation. With a large mortgage balance it's entirely possible for her to be in a situation where she has a significant tax bill and no resources to pay it. This would be true if she did a cash-out re-fi and spent the proceeds, for example.