Capital gain tax on assumed loan

[Normgreene]

Relative purchase house 02/2016 for $220,000

I assumed his VA loan of $212,000 on 08/2017 (value of house not appraised at the time but probably worth $235,000)

Relative continued to live in house and it was not my primary residence

I want to sell the house for $275,000 in 11/2018

What is my exposure for capital gains?

 

[Zigner]

Relative purchase house 02/2016 for $220,000

I assumed his VA loan of $212,000 on 08/2017 (value of house not appraised at the time but probably worth $235,000)

Relative continued to live in house and it was not my primary residence

I want to sell the house for $275,000 in 11/2018

What is my exposure for capital gains?

This would be a great question for your accountant and/or tax pro.

 

[Taxing Matters]

Relative purchase house 02/2016 for $220,000

I assumed his VA loan of $212,000 on 08/2017 (value of house not appraised at the time but probably worth $235,000)

Relative continued to live in house and it was not my primary residence

I want to sell the house for $275,000 in 11/2018

What is my exposure for capital gains?

When you assumed the loan did you also get title to the home? In other words, did the relative in effect sell you the home with your purchase price being the assumption of the mortgage on the home? If the answer is yes, then you purchase price (assuming the loan assumption was your only cost to buy it) was $212,000. That was then your starting basis in the home. If the relative was your tenant after you bought it then you would have depreciated the house during the period of the rental. The depreciation is a deduction on your tax return but also lowers your basis in the home.

When you sell the home you will have gain. Your gain is the sales price (after deducting sales costs) minus your adjusted basis in the home. If you had no depreciation and no other adjustments to basis then your adjusted basis is the $212,000 that you bought the home for. So if you sold it for $275,000 and had $5,000 in sales expenses, your net sales price is $270,000. Your gain would be $270,000 - $212,000 basis = $58,000 gain. You have held the home for more than one year so your maximum federal tax on the capital gain is 20%, meaning the tax may well be $58,000 x 20% = $11,600.

If you have depreciation, then your adjusted basis will be lower and thus your gain will be greater (but then you got the benefit of the depreciation, too). You would also have depreciation recapture. And make sure you included your rental income on your returns, too, in that case.

You would not qualify for any exclusion of gain since you did not live in the home as your principal residence for two years and did not own it for two years.

For more details on how the gain is computed see IRS publications 551 (basis) and 544 (sales of property.) If the property was a rental property then you should also see publication 527.

If you live in a state with an income tax or if the home is in a state that has an income tax you will owe state income tax on the gain as well.

 

[AdamHurly]

When you assumed the loan did you also get title to the home? In other words, did the relative in effect sell you the home with your purchase price being the assumption of the mortgage on the home? If the answer is yes, then you purchase price (assuming the loan assumption was your only cost to buy it) was $212,000. That was then your starting basis in the home. If the relative was your tenant after you bought it then you would have depreciated the house during the period of the rental. The depreciation is a deduction on your tax return but also lowers your basis in the home.

When you sell the home you will have gain. Your gain is the sales price (after deducting sales costs) minus your adjusted basis in the home. If you had no depreciation and no other adjustments to basis then your adjusted basis is the $212,000 that you bought the home for. So if you sold it for $275,000 and had $5,000 in sales expenses, your net sales price is $270,000. Your gain would be $270,000 - $212,000 basis = $58,000 gain. You have held the home for more than one year so your maximum federal tax on the capital gain is 20%, meaning the tax may well be $58,000 x 20% = $11,600.

If you have depreciation, then your adjusted basis will be lower and thus your gain will be greater (but then you got the benefit of the depreciation, too). You would also have depreciation recapture. And make sure you included your rental income on your returns, too, in that case.

You would not qualify for any exclusion of gain since you did not live in the home as your principal residence for two years and did not own it for two years.

For more details on how the gain is computed see IRS publications 551 (basis) and 544 (sales of property.) If the property was a rental property then you should also see publication 527.

If you live in a state with an income tax or if the home is in a state that has an income tax you will owe state income tax on the gain as well.

Thanks for your post it clears my doubts also