If one person sells a residential property and buy an other jointly with children. Any IT liability?

Question

A person sold his residential property and purchased another under construction with more value jointly with his children. The person keeps himself as the first person and children the second and third. A part of the deal is shared by the children. Any Income Tax complication in this connection.

Answer 1

If a person lived in a home for at least 2 of the past 5 years, then sells the home, gain on the sale up to $250,000 is excluded from capital gains tax ($500,000 if married). So there may or may not be tax implications for you on the sale.

As for the new purchase, there is no income tax liability unless it is a rental property. Rental income and expenses would be reported by the owners on Form 1040, Schedule E of their individual tax returns.

Answer 2

If the property that was sold was the principal residence of the seller and was occupied for 2 of the last 5 years immediately prior to the sale, all or part of the gain on sale may be excluded from tax. The exclusion limits are $250,000 for a Single taxpayer or $500,000 for a couple filing Married Filing Jointly.

Any gain above the exclusion amount is taxable as capital gains. The tax rate will depend upon how long the property was owned. If it was owned for 1 year or less, it's taxed as ordinary income at the marginal rate. If it was owned for over 1 year, it's taxed at the lower long-term capital gains rate, normally 15%.

There would be no direct income tax implications on the purchase of the new home. Any owners whose names were on the mortgage as borrowers could share the mortgage interest deduction. Any owners whose names are on the deed can share the property tax deduction.

Answer 3

If this property is rented out, then the earnings would be reported on the owners' 1040's as rental income as they actually received it. If one owner never receives any income, they need not report any on their 1040.

If you are asking about the mortgage interest deduction, it works the same way. You can deduct only what you actually paid, regardless of the total amount.

Answer 4

You betcha......all of you are the targets when Uncle Sam wants his share, or it was done incorrectly and you own something from back taxes, or whatever. The only problem is, Uncle Sam can target the one that has the highest probability of paying him back, so if it isn't you, it might be your children.

Unfortunately for you, you are all on the title.....if it were just you, they could repo the property and resell it if you were liable. But you mentioned you have the children on the name of the trust, that means Uncle Sam could go after them and bankrupt their lives to pay for you.

Sad to say, I've seen it before here, I live in southern Cali where people do anything to get into a house, and anything to get out of a house......