Home Sale Question

[mtw1000]

Hi, I have a home owned in joint tenancy with my girlfriend. We have a loan on the property today of $400k. She is buying my 1/2 ownership for a total price of $340k based on the property value and will refinance the property with a loan in her name only. Is 1/2 ($200k) of the previous loan going to be a 1099(c) item for me affecting my taxes? When I calculate gain will I compare $340k to the basis or $540k? Thank you!

 

[LdiJ]

Hi, I have a home owned in joint tenancy with my girlfriend. We have a loan on the property today of $400k. She is buying my 1/2 ownership for a total price of $340k based on the property value and will refinance the property with a loan in her name only. Is 1/2 ($200k) of the previous loan going to be a 1099(c) item for me affecting my taxes? When I calculate gain will I compare $340k to the basis or $540k? Thank you!

Your basis will be 1/2 of what was originally paid for the home plus 1/2 of any major improvements. The difference between your basis and what she pays you for your 1/2 will be your capital gain. However, as long as you have lived in the home as your primary residence for at least two full years out of the last 5, you won't be paying any capital gains tax.

 

[mtw1000]

Your basis will be 1/2 of what was originally paid for the home plus 1/2 of any major improvements. The difference between your basis and what she pays you for your 1/2 will be your capital gain. However, as long as you have lived in the home as your primary residence for at least two full years out of the last 5, you won't be paying any capital gains tax.

Understand about the basis and I agree with your statement. My question is related to the sale price for tax purposes. Is it just the $340k she is paying me or is 1/2 of the $400k current mortgage her and I have together that will go away when she refinances also a part of that calculation for me. I have researched debt foregiveness, but am a bit confused on this topic.

 

[LdiJ]

Understand about the basis and I agree with your statement. My question is related to the sale price for tax purposes. Is it just the $340k she is paying me or is 1/2 of the $400k current mortgage her and I have together that will go away when she refinances also a part of that calculation for me. I have researched debt foregiveness, but am a bit confused on this topic.

What taxes are you talking about? For income tax purposes I have already described the only taxes involved.

 

[mtw1000]

What taxes are you talking about? For income tax purposes I have already described the only taxes involved.

Thanks for your response by the way. For example, she pays me $340k and my basis is $300k. Is my tax gain $40k or must I include 1/2 of the current mortgage that I am indebted on as foregiven debt. That loan and my responsibilty goes away when she refinances in her name only. Sorry if this is a bit confusing. If I would need to include my responsibilty on the old loan that goes away my tax gain would be $40k plus $200k for a total of $240k.

 

[LdiJ]

Thanks for your response by the way. For example, she pays me $340k and my basis is $300k. Is my tax gain $40k or must I include 1/2 of the current mortgage that I am indebted on as foregiven debt. That loan and my responsibilty goes away when she refinances in her name only. Sorry if this is a bit confusing.

A forgiven debt is a debt that you do not end up paying...a debt that the lender ends up forgiving. A debt that goes away due to the sale of a property has no tax impact. You just get less net proceeds from the sale. Yes, in your example your capital gain would be 40k but if you lived in the home for two of the last 5 years as your primary residence, you would exclude that 40k from taxable income.

 

[mtw1000]

A forgiven debt is a debt that you do not end up paying...a debt that the lender ends up forgiving. A debt that goes away due to the sale of a property has no tax impact. You just get less net proceeds from the sale. Yes, in your example your capital gain would be 40k but if you lived in the home for two of the last 5 years as your primary residence, you would exclude that 40k from taxable income.

Thanks so much. That helps clarify for my tax planning.

 

[Taxing Matters]

Understand about the basis and I agree with your statement. My question is related to the sale price for tax purposes. Is it just the $340k she is paying me or is 1/2 of the $400k current mortgage her and I have together that will go away when she refinances also a part of that calculation for me. I have researched debt foregiveness, but am a bit confused on this topic.

This is not a situation in that involves discharged (forgiven debt). She is however paying you $340k and you are being relieved of your share of the debt on the home, which is 200k. That means the total consideration you are getting from her is $540k. If your basis is $300k in your half then your capital gain $240k. If you qualify for the full $250k of gain exclusion for having owned the home and lived in it for at least 2 years then there is no capital gain tax you have to pay.

 

[mtw1000]

This is not a situation in that involves discharged (forgiven debt). She is however paying you $340k and you are being relieved of your share of the debt on the home, which is 200k. That means the total consideration you are getting from her is $540k. If your basis is $300k in your half then your capital gain $240k. If you qualify for the full $250k of gain exclusion for having owned the home and lived in it for at least 2 years then there is no capital gain tax you have to pay.

Thanks that is what I thought. I could not find a clear answer in the regulations. It is important from my perspective to know that the $200k in debt is part of my calculation.

 

[Taxing Matters]

Thanks that is what I thought. I could not find a clear answer in the regulations. It is important from my perspective to know that the $200k in debt is part of my calculation.

It is not expressly stated in the tax code or the regulations, but you see it in the case law (court decisions). You get the right result when you apply fairly straightforward tax principles. I'll give an example. Amy wants to sell her property to Bill. The property is worth $200,000 and Amy has a mortgage on the property for $125,000. Amy's basis in the property is $150,000.

Consider two ways of doing the same transaction. It helps to first look what the result would be with an all cash transaction first, then compare that to what the transaction looks like with assumption of the debt.

In the first version of the transaction, Bill borrows the money to buy the property and gives a check to Amy for $200,000. Amy then pays off her mortgage at the closing, leaving her with $75,000 in cash at the end and she no longer owes the mortgage. Her capital gain on the property is $200,000 cash received less her basis of $150,000 = $50,000 gain.

In the second version of the transaction, Bill gives Amy a check for $75,000 and fully assumes her loan with her lender, thus relieving her of liability for it. Amy is in exactly the same position after this transaction as she was in the first, she has $75,000 cash and no longer owes the mortgage. By assuming the debt, Bill has done the same thing as if he gave her a check for $125,000 and then Amy paid off her mortgage with that cash. Thus the tax law treats this exactly as if that is what happened: the $125,000 of debt assumed is treated like additional cash in the deal to Amy. So what Amy got out of the deal was $125,000 from the debt Bill assumed + $75,000 cash for total consideration of $200,000. Her gain then works out the same as above: $200,000 in consideration received less $150,000 basis = $50,000 gain.

Since Amy ended up in the same position in both transactions — she has $75,000 in cash and does not owe the mortgage anymore — you would expect that the tax results should be the same too. And that is exactly how it works out. That way, there is no tax incentive to structure it one way over the other. The parties can structure the deal either of the two ways that works best for them but whichever one it is, the tax consequences are the same.

 

[mtw1000]

It is not expressly stated in the tax code or the regulations, but you see it in the case law (court decisions). You get the right result when you apply fairly straightforward tax principles. I'll give an example. Amy wants to sell her property to Bill. The property is worth $200,000 and Amy has a mortgage on the property for $125,000. Amy's basis in the property is $150,000.

Consider two ways of doing the same transaction. It helps to first look what the result would be with an all cash transaction first, then compare that to what the transaction looks like with assumption of the debt.

In the first version of the transaction, Bill borrows the money to buy the property and gives a check to Amy for $200,000. Amy then pays off her mortgage at the closing, leaving her with $75,000 in cash at the end and she no longer owes the mortgage. Her capital gain on the property is $200,000 cash received less her basis of $150,000 = $50,000 gain.

In the second version of the transaction, Bill gives Amy a check for $75,000 and fully assumes her loan with her lender, thus relieving her of liability for it. Amy is in exactly the same position after this transaction as she was in the first, she has $75,000 cash and no longer owes the mortgage. By assuming the debt, Bill has done the same thing as if he gave her a check for $125,000 and then Amy paid off her mortgage with that cash. Thus the tax law treats this exactly as if that is what happened: the $125,000 of debt assumed is treated like additional cash in the deal to Amy. So what Amy got out of the deal was $125,000 from the debt Bill assumed + $75,000 cash for total consideration of $200,000. Her gain then works out the same as above: $200,000 in consideration received less $150,000 basis = $50,000 gain.

Since Amy ended up in the same position in both transactions — she has $75,000 in cash and does not owe the mortgage anymore — you would expect that the tax results should be the same too. And that is exactly how it works out. That way, there is no tax incentive to structure it one way over the other. The parties can structure the deal either of the two ways that works best for them but whichever one it is, the tax consequences are the same.

Thanks, that does make economic sense to me. And I should still be OK (below $250k and meeting other requirements) based on the IRS criteria and my calculated net gain. I am a career long finance person, but NOT an expert in taxation. That is why I thought this would be a good forum to get the view of others that have more experience in this area.

 

[Taxing Matters]

Thanks, that does make economic sense to me. And I should still be OK (below $250k and meeting other requirements) based on the IRS criteria and my calculated net gain.

Yes, based on the numbers you gave here, it seems your gain would be just below the $250,000 of gain you can exclude under Internal Revenue Code (IRC) § 121 if you meet the two year ownership and use tests. So you'd still end up with no capital gain in the end.