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Capital Gains on Gifted Property

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tonewbeginnings

Junior Member
What is the name of your state? NY

Ten years ago, our parents had gifted to me and my sibling, the house we live in. We're in the process of selling the house now and we're trying to determine the tax implications of what we're doing.

The particular details are listed below:

Parents purchase house thirty years ago: $77,000
Value @ time of gift ten years ago: $300,000
Current value: $770,000

We understand our cost basis is going to be what our parents paid for the house: $77,000 and not what the value of the house was when it was gifted to us. Am I correct in this?

Now that we're selling the house, I also understand that both my sibling and I have a $250k exclusion we can take advantage of when filing. This would mean we have $500k total. Our taxable amount then, would then $270k. The $270k would be taxed at 15% long term capital gains. Am I correct in understanding this too?

Up to that, I think I've understand what should happen when filing, but where I do get confused is:

1. We're planning on purchasing two separate (smaller) houses with the proceeds. Does this affect the taxable amount we pay on capital gains?

2. If so, would this change things further if we kept both properties under one of our names?

3. When we close on the selling of our house, do the proceeds have to be divided equally between the two of us for tax purposes? If not, can we have the proceeds be made to one of us and we still take the $500k exclusion?

We've been so confused trying to figure this out ourselves. We've already made an appointment to see an accountant, but we'd love to try to become educated as best we can before we see the accountant.

Thank you all!
 


tranquility

Senior Member
You are correct, you have the basis of your parents when you were gifted the property and when you sell you will have long term capital gains.

You need to have lived in and owned the property for 2 of the last 5 years for the $250,000 exemption (per person). How is title held? You will still be able to remove the basis from the selling amount after (actually, before) the exemption.

Purchasing another personal residence will not affect your capital gain tax, that part of the law is long gone. I don't understand #2, but it concerns me that you will be playing games with title.

#3 again concerns me. You don't get to shift things around with double tap-tap's. How is title held? What are the ownership percentages? If only one is on title, forget the $500k and plan on the $250k instead. If ownership is 1/2 and 1/2, the proceeds are owned 1/2 and 1/2. You may gift them, but if the amount gifted is over $12,000 you need to file a gift tax return.

Don't try to figure this out yourselves, it's a lot of money and it seems clear there are some issues you need to resolve before jumping into things.
 

tonewbeginnings

Junior Member
tranquility said:
Purchasing another personal residence will not affect your capital gain tax, that part of the law is long gone. I don't understand #2, but it concerns me that you will be playing games with title.
Title of the two new smaller houses would be under one name. I was under the impression that purchasing a new house would offset the capital gains, but if I understand you correctly, that's not the case anymore? Going from one primary residence to another primary residence doesn't offset the capital gains (for at least one of the two houses we are planning to buy)?

tranquility said:
#3 again concerns me. You don't get to shift things around with double tap-tap's. How is title held? What are the ownership percentages? If only one is on title, forget the $500k and plan on the $250k instead. If ownership is 1/2 and 1/2, the proceeds are owned 1/2 and 1/2. You may gift them, but if the amount gifted is over $12,000 you need to file a gift tax return.
Title is held under both of our names (my sibling and I). Joint ownership with right of survivorship. So, for tax purposes, the distributions will be 50/50, but when the checks are cut at closing for the selling of the house, do they have to be 50/50 is my question?

tranquility said:
Don't try to figure this out yourselves, it's a lot of money and it seems clear there are some issues you need to resolve before jumping into things.
Definitely not by ourselves... We just want to get a headstart at educating ourselves and understanding the whole process work. Really appreciate the help on the headstart!
 
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tranquility

Senior Member
You can defer capital gain taxes in an exchange of like properties. One of the criteria for such an exchange is that the properties are being held for business. That did not seem the case here. The law used to be you could change personal residences to defer the taxes, but that is no longer the case.

Everything is owned 50/50 by your facts. Distribution is the same. If it is different, it is going to be a gift, or income, or a payment of principal in a loan in some way.
 

kblackie

Junior Member
tranquility said:
You can defer capital gain taxes in an exchange of like properties. One of the criteria for such an exchange is that the properties are being held for business. That did not seem the case here. The law used to be you could change personal residences to defer the taxes, but that is no longer the case.

Everything is owned 50/50 by your facts. Distribution is the same. If it is different, it is going to be a gift, or income, or a payment of principal in a loan in some way.
Actually that statement is somewhat misleading. It applies to property aquired via trade and not used in a business.

If more than one person owns a home, even if it was gifted, each can exclude $250k of the capital gains from income, regardless whether the proceeds were used to purchase a new home. Thus if there are 2 owners, (you and your sibling) that excludes $500k of the sale ($250k each) plus the cost basis of $77k.

If you sold the home for $577k, there would be no tax liability (assuming you paid no gift tax ont he property when you received it). If the home sold for $677, the capital gains each of you would be required to pay on, would be $50k ($677k - $77k basis - $500k exclusion / 2).

Of course there are some things that add to the cost basis of the home, such as real property improvements, and there are other things which you can use to reduce the $50k such as real estate fees incurred during the sale of the home.

There is no requirement for you to purchase a new home. You could simply take a nice trip and spend it all.

Forgot to add ... see this IRS publication http://www.irs.gov/pub/irs-pdf/p523.pdf
 

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