Complicated property transfer

[rbtconsultants]

What is the name of your state? Pennsylvania

My wife's parents sold their home and bought a new one in 2003,using $46k (20% of $230k) from the sale to buy the new home. The monthly payment (P/I/taxes/insurance) is $1800. We have been paying it and they pay us $600 a month. I assume this can be treated as a gift, not rent. We also own our own home. We have been deducting interest and taxes for both properties. My in-laws have not.

All 4 of us (my in-laws, my wife and I) are named on the mortgage and deed, and the deed specifies right-of-survivorship. In January this year my father-in-law passed away, and now my mother-in-law and sister-in-law (who lives there with my mother-in-law but has no prior interest in the property) want to buy us out. We have paid $35k out-of-pocket and want to recover that plus some profit. The house is worth $280k with current mortgage balance $170k, so they will get a $210k mortgage to pay off old mortgage and pay us $40k..

What is our tax liability on the $40k?

Thank you for your help.

[LdiJ]

Originally Posted by rbtconsultants

What is the name of your state? Pennsylvania

My wife's parents sold their home and bought a new one in 2003,using $46k (20% of $230k) from the sale to buy the new home. The monthly payment (P/I/taxes/insurance) is $1800. We have been paying it and they pay us $600 a month. I assume this can be treated as a gift, not rent. We also own our own home. We have been deducting interest and taxes for both properties. My in-laws have not.

All 4 of us (my in-laws, my wife and I) are named on the mortgage and deed, and the deed specifies right-of-survivorship. In January this year my father-in-law passed away, and now my mother-in-law and sister-in-law (who lives there with my mother-in-law but has no prior interest in the property) want to buy us out. We have paid $35k out-of-pocket and want to recover that plus some profit. The house is worth $280k with current mortgage balance $170k, so they will get a $210k mortgage to pay off old mortgage and pay us $40k..

What is our tax liability on the $40k?

Thank you for your help.

No kidding its complicated. Which is why I believe that its possible that this question is homework rather than reality.

If its not, then you really must take it to a professional. Its not an appropriate question for an internet forum.

In any case...the 600.00 per month that you received was neither a gift nor rent. It was a contribution towards the mortgage.

[rbtconsultants]

Thank you for your reply. No, unfortunately this is not homework :-)

When you say " the $600 a month is a contribution to the mortgage", does that have any relevant impact? Is this just semantics? My point was that we were not reporting it to the IRS as rent (or reporting anything about it at all for that matter), and my wife and I were deducting all taxes and interest on the property from our income tax. So, therefore, my supposition was to view it as a $7200 per year gift from parent to child so it did not become relevant for how much my wife and I could deduct, and it does not need to be reported as rental income. Would you disagree? Is this not just semantics and we should have handled this differently?

I agree that I could use a professional here. I was hoping to get some useful info if possible :-)

I'm wondering if the way to go here is to transfer ownership of the property to my Mother-in-law, and view the $40k as compensation for our stake in the equity of the property. I'd like to do this in a manner that allows us to use the original purchase price of the home as the cost basis and therefore the $40k would not represent any capital gain.

Another thought would be to consider our half of the original equity (which was $23k) as a gift already given from them in 2003, and the rest as a gift from her in 2006.

Any thoughts on either approach?

Thank you for your help.

[LdiJ]

Originally Posted by rbtconsultants

Thank you for your reply. No, unfortunately this is not homework :-)

When you say " the $600 a month is a contribution to the mortgage", does that have any relevant impact? Is this just semantics? My point was that we were not reporting it to the IRS as rent (or reporting anything about it at all for that matter), and my wife and I were deducting all taxes and interest on the property from our income tax. So, therefore, my supposition was to view it as a $7200 per year gift from parent to child so it did not become relevant for how much my wife and I could deduct, and it does not need to be reported as rental income. Would you disagree? Is this not just semantics and we should have handled this differently?

I agree that I could use a professional here. I was hoping to get some useful info if possible :-)

I'm wondering if the way to go here is to transfer ownership of the property to my Mother-in-law, and view the $40k as compensation for our stake in the equity of the property. I'd like to do this in a manner that allows us to use the original purchase price of the home as the cost basis and therefore the $40k would not represent any capital gain.

Another thought would be to consider our half of the original equity (which was $23k) as a gift already given from them in 2003, and the rest as a gift from her in 2006.

Any thoughts on either approach?

Thank you for your help.

It was neither a gift NOR reportable income. All four of you are listed on the home, therefore its totally acceptable for all 4 of you to contribute towards the mortgage payment. Its also acceptable for the 4 of you to decide that you and your wife will take the interest deduction.

You originally bought the property for 230k. Your basis is 1/2 (you and your wife) of 230k.

That is 115,000. If they buy you out they are buying you out for 1/2 of the remaining mortgage 85k plus the 40k you believe that you should receive. That is a total of 125k. Therefore you will have 10k of capital gains, and will have to pay taxes on that amount.

Please remember that you got the benefit of the tax deduction for the interest and property taxes for 2003, 2004 and 2005. Therefore take that into consideration in determining how much "profit" you really need to receive....particularly since the downpayment was paid by your inlaws.

[rbtconsultants]

I understand. Thank you for taking time to help. It is much appreciated.

Bob