Need Capital Gains Tax Advice

[Kyle Doney]

July 13' my parents gave me a loan for my primary house because I am self employed and had a hard time getting a loan. I should be able to get a loan after tax season and buy the property. Since they are helping me out they are taking a small percent interest and selling me the house for the same price it was purchased for in 2013. Their accountant is saying they will owe thousands in capital gains. If their only gain is the "rent" payment they receive which goes to their HELOC and they make a small percentage on it, why would they have high capital gains? Is there a way to transfer this property into my name without being taxed heavily? I will be paying these taxes for them, so I am trying to figure out the best possible way to go about this transaction.

[Jon Holdman]

I'm confused.  You say they gave you a loan but you also say they're selling you the house.  What's really going on?  Both of those statements can't be correct.

I assume from what you wrote they actually own the house and are renting it to you.  And they are going to sell you the property sometime in spring of 2015 for the same price they paid in 2013.  I can't see how they would possibly owe capital gains tax.  But they may owe tax on unrecaptured depreciation.

Their basis started at the price they paid plus purchase related costs.  The basis would be decreased by the amount of depreciation taken or allowed (whichever is greater, they should be equal).  So, that's a little under two years depreciation.  When they sell it to you they will still have some closing costs.   Those get subtracted from the net sales price.  Because the two prices are the same and they have costs on both ends they actually have a loss on this deal.  But they may still have some gains.  That's because the basis is reduced by depreciation for rentals.  So, if the depreciation is more than their costs on the buy and sell transaction they would have some recapture tax on that.

If you want a contact for a local CPA who's very knowledgeable about real estate I can give you one.  Perhaps there's something more going on here.