gift taxes and capital gains

What is the name of your state? California

I live in LA and want to sell my house and move to Austin. Both my parents and I are on the deed, though it was a verbal gift to me. They live in Texas and claim my house as a second residence since I have lived here for 10 years. The mortgage is paid off. The house was bought for $110,000 with $50,000 in upgrades. Adjusted basis is $160,000. I should walk away with $500,000 after all the fees are paid. My questions are...would I qualify for the $250,000 exemption? How would this all work regarding the capital gains with all of us on the deed? Would it be best to have him Quickdeed me the house as a gift?

He also rolled over capital gains from an income property prior to 1997 as a down payment of $26,000. I know it's messy but please help! I need to know what I will be working with before I buy another house. Thanks!!

What you walk away with is irrelevant to calculating capital gains. You basic calculation will be to subtract your basis amount from the amount realized. (Less costs.) You then divide that by 2 to determine your portion which will have the $250,000 exemption. Your parents will pay capital gains on their 1/2 portion. If they gift it to you, you will take their basis and will pay for any capital gain over your exemption amount.

gift deed

If they gift me the house, will they have to pay taxes on this? What would you suggest be my best route to take? What do you mean by their "basis?"

I would rather have the selling transaction and taxes clean by having the title in my name but I want to save the most money. Thank you.

Basis is essentially what you calculated with:

The house was bought for $110,000 with $50,000 in upgrades. Adjusted basis is $160,000.

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This may change if depreciation were ever taken on the property.

They will probably not have to pay any taxes on gifting the house to you, as the exemption is currently $1,000,000, but they would have to file a gift tax return. The best scenario is not possible to determine without getting all the facts and it is not possible over this forum. I don't know your numbers exactly, but you may get some benefit from having the property gifted to you so you can take more of the $250,000 exclusion. That has the cost of the gift tax return and of your parents giving you the money.

I am also assuming you incorrectly used the term "rolled over" money from a prior sale of income property into the house. Using money from another sale is not a problem, but if it was a true like-kind exchange or it was a residence, other calcualtions would need to be made.

$250,000 exemption

Thank you Tranquility. After I have to house "gifted" to me...

If the house gains $340,000 after all is said and done, do I deduct the $250,000 from the gain to get the amount taxed? Can I add the upgrades to this? I'm just getting some rough numbers and an idea before I go to an accountant.

Thanks again for your help.

freewaystar said:

Thank you Tranquility. After I have to house "gifted" to me...

If the house gains $340,000 after all is said and done, do I deduct the $250,000 from the gain to get the amount taxed? Can I add the upgrades to this? I'm just getting some rough numbers and an idea before I go to an accountant.

Thanks again for your help.

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Yes, if they gift the property to you, then you will be entitled to take your full 250k exclusion against the capital gain.

Calculation if they don't gift you their share:

You: 1/2 of basis (160,000/2) = 80,000. 1/2 of sales price 250,000. 250,000 - 80,000
equals a captial gain of 170,000 You can exclude the entire 170,000

Your parents: Same 170,000 capital gain - no exclusion, they must pay capital gains tax on the entire amount.

If your parents gift you their share:

sales price 500,000 - 160,000 basis =340,000 capital gain. You get a 250,000 exclusion and must pay capital gains tax on 90,000.

Before you decide what to do, consider everyone's tax bracket. If your parents are in the 15% bracket or lower, some of their capital gains will be taxed at 5%, the rest at 15%. Chances are all your taxable gains will be taxed at 15%. Of course, the reverse might be true. Take both parties' info to the tax pro for a complete answer.