Home Sale: Disbursement of funds and tax exclusion

[parker55]

What is the name of your state (only U.S. law)? CA.

Selling a property that is set to close in early July. Title is in my name and fathers name. Father lived here initially. I have lived on property for the last 10 years and made all of the payments during this time. Spent a lot on improvements to property too. My father does not want any proceeds from the sale. However, he is on title and escrow is saying he will get 50% of the $240K profit.

QUESTION IS: Do funds need to be disbursed 50/50?

The reason this is important is I qualify for the $250,000 home sale tax exclusion. My father will not since he has not lived on the property for many years.

Is there anything that can be done where I get 100% of proceeds?

 

[LdiJ]

What is the name of your state (only U.S. law)? CA.

Selling a property that is set to close in early July. Title is in my name and fathers name. Father lived here initially. I have lived on property for the last 10 years and made all of the payments during this time. Spent a lot on improvements to property too. My father does not want any proceeds from the sale. However, he is on title and escrow is saying he will get 50% of the $240K profit.

QUESTION IS: Do funds need to be disbursed 50/50?

The reason this is important is I qualify for the $250,000 home sale tax exclusion. My father will not since he has not lived on the property for many years.

Is there anything that can be done where I get 100% of proceeds?

Are you receiving 240k more than you originally paid for the house or is the 240k the proceeds after the mortgage is paid off? 50% of the proceeds are going to get reported in your father's name since he is a co-owner of the house. Since he did not live in the house he will not be eligible for the exclusion. Therefore he is going to owe capital gains tax on his share of the money.

Your father can certainly gift you as much of the money as he likes, but he is still going to be on the hook for the taxes, so do not expect him to gift you all of it. He will also need to file a gift tax return, but will not owe any gift tax unless he has already gifted more than 5 million in his lifetime.

 

[FlyingRon]

As LIDJ alludes, the check you receive from the settlement has little to do with the taxable issue. The question is what is the difference between the basis (the purchase price and all the capital improvements made) and the sales price (minus real estate commissions and other costs of sale). This is the capital gain and you each will be responsible for half (regardless of what you do with the money). The mortgage payoff has nothing to do with basis or capital gain. If you used it as your principal residence for two years, then you can exclude $250,000 of gain. Your father has no such exclusion if he didn't reside there. He'll pay long term capital gains tax on the gain.

 

[parker55]

Are you receiving 240k more than you originally paid for the house or is the 240k the proceeds after the mortgage is paid off? 50% of the proceeds are going to get reported in your father's name since he is a co-owner of the house. Since he did not live in the house he will not be eligible for the exclusion. Therefore he is going to owe capital gains tax on his share of the money.

Your father can certainly gift you as much of the money as he likes, but he is still going to be on the hook for the taxes, so do not expect him to gift you all of it. He will also need to file a gift tax return, but will not owe any gift tax unless he has already gifted more than 5 million in his lifetime.

We are getting $240K more than what we paid.

 

[LdiJ]

We are getting $240K more than what we paid.

As FlyingRon said the capital gain calculation is as follows:

Sales Price (sales proceeds minus selling costs) minus Basis (original purchase price plus capital improvements) equals your capital gain. Your father will be taxed on half of the actual capital gain.

 

[tranquility]

Pity he didn't gift you his half before it went into escrow.

 

[LdiJ]

Pity he didn't gift you his half before it went into escrow.

I thought of that as well, but if it still has a mortgage that might have been problematic too.

 

[tranquility]

I thought of that as well, but if it still has a mortgage that might have been problematic too.

Father to son? Not really. They could have written protections where father could have gone against son and house if not sold in a certain amount of time to protect dad from son turning rogue and not paying the mortgage. (Unlikely with $240K in equity.)

https://www.law.cornell.edu/uscode/text/12/1701j-3

(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

 

[parker55]

Another escrow company

We called 2 escrow companies in the area and they said it shouldn't be a problem. Just add to instructions net proceeds go to one party. Both parties agree to this and sign. Only one 1099 would go out.

Who has it right here?

 

[FlyingRon]

We called 2 escrow companies in the area and they said it shouldn't be a problem. Just add to instructions net proceeds go to one party. Both parties agree to this and sign. Only one 1099 would go out.

Who has it right here?

Again, the what happens "proceeds" has absolutely NOTHING to do with whether there is a capital gain.

If the sale results in a capital gain and is not excludable the escrow company is OBLIGATED to issue a 1099-A. Even if they fai to issue a 1099 doesn't mean the tax liability isn't there.

 

[parker55]

ThanksRon

Again, the what happens "proceeds" has absolutely NOTHING to do with whether there is a capital gain.

If the sale results in a capital gain and is not excludable the escrow company is OBLIGATED to issue a 1099-A. Even if they fai to issue a 1099 doesn't mean the tax liability isn't there.

FlyingRon...thanks for the replies.

Just got off the phone with a local real estate attorney. He asked for the regulation they are using that says they have to disburse 50/50 and send 1099 to both parties. He said to ask the escrow company and he would talk with them

You mentioned they are obligated to issue a 1099 to both? What exactly obligates them? Is there a specific regulation?

Thanks!

 

[FlyingRon]

You mentioned they are obligated to issue a 1099 to both? What exactly obligates them? Is there a specific regulation?

Thanks!

I didn't say that. I said they're oblgated to issue a 1099 report of sale if there is a non-excludable taxable gain.\

https://www.irs.gov/irb/2007-04_IRB/ar09.html

 

[tranquility]

FlyingRon...thanks for the replies.

Just got off the phone with a local real estate attorney. He asked for the regulation they are using that says they have to disburse 50/50 and send 1099 to both parties. He said to ask the escrow company and he would talk with them

You mentioned they are obligated to issue a 1099 to both? What exactly obligates them? Is there a specific regulation?

Thanks!

The instructions on the 1099-s allows the transferor(s) to tell the required issuer how to allocate the funds. If you read FlyingRon's post again, he is not saying anything in regards to the 1099. In fact, you can say what you want and the 1099 will reflect it.

https://www.irs.gov/instructions/i1099s/ar02.html

For multiple transferors of the same real estate, you must file a separate Form 1099-S for each transferor. At or before closing, you must request from the transferors an allocation of the gross proceeds among the transferors. The request and the response are not required to be in writing. You must make a reasonable effort to contact all transferors of whom you have knowledge. However, you may rely on the unchallenged response of any transferor, and you need not make additional contacts with other transferors after at least one complete allocation is received (100% of gross proceeds, whether or not received in a single response). If you receive the allocation, report gross proceeds on each Form 1099-S accordingly.

You are not required to, but you may, report gross proceeds in accordance with an allocation received after the closing date but before the due date of Form 1099-S (without extensions). However, you cannot report gross proceeds in accordance with an allocation received on or after the due date of Form 1099-S (without extensions).

But, the 1099 is not the INCOME, it is the required reporting.

A 1099 does not represent income. There are any of a number of ways a 1099 can be explained as not income. Personally? I do taxes. In similar situations, I always report the 1099 received in full and take away from it with other explanations. (Deductions, nominee, joint owner; whatever.) When doing so, the taxpayer signs his return *under penalty of perjury* the facts it contains. Are you and your father ready to swear lies that hurts the government about $18,000 and the state about $12,000? While an explanation might garner additional interest by the taxing authorities, that is not the only way they can find out. Perjury, tax fraud and major misrepresentation penalties are avoided if the government (State or federal.) does not find out. If they do? Whole. Different. Problem.

I remember a few years ago when the IRS reviewed all transfers of property in my state. Obviously, there was not a guy who looked at them all, but a program/bot that reviewed the data. The purpose was to catch people who transferred property with not compensation without filing a gift tax return. I don't think that garnered much in either income or additional returns. But, the result of the program has not been released. With increasing computerization and expert systems today, do you really want to lie about what is going on in your situation? I have no idea as to if you would be caught. That alone may not be a bad bet. But...if you are brought under the radar (Or, father.), I suggest you be able to prove your reporting is correct.

Prove it.

Unless you think the government does not care about $30,000.

A 1099 needs to be explained. Reality is what it is.