Meridian, ID · Member since 2019 · 9 posts · 1 vote
So over two years ago me and my wife decided to buy a house in Idaho. Found a house, made an offer but my credit didn’t show up so wasn’t able to get the lone in time when we needed it. My Dad stepped in and bought the house with a conventional loan so we wouldn’t miss out on the house.
We have an agreement that within five years we would buy back the house from him for the original price or sell it and keep any capital.
Well now our house has 70k in capital and we want to sell and invest that money in a new house.
My question is, how does my dad sell the house and not have to pay the capital gains tax on the money that will be ours.
Because I have paid all the bills for two years and sent my dad the “rent” that just covers the Morgage, can he put me on the title and then sell it as my primary residence somehow.
Specialist · Chicago · Member since 2018 · 126 posts · 51 votes
7y
WOW! that is a loaded question. Was he paying taxes on the rent income? Did you use your "rent payment" on your taxes? Did he use the interest as a deduction on his taxes?
You need a lawyer to sort this out and not get into mortgage or tax fraud.
He will have capital gains if he sells out-right and does not invest it somewhere.
Meridian, ID · Member since 2019 · 9 posts · 1 vote
7y
@Michele Wax I’m not sure what my dad has done tax wise, he told me he would talk to his lawyer for advice. We put rent on our taxes.
I know he would have capital gains if he sold it at market value now. I’m wondering if there’s a way to maybe sell to us with no gain (original price) and then we sell the house?
Specialist · Purcellville, VA · Member since 2015 · 1k+ posts · 841 votes
7y
@David Asche,
While it’s legal, and perhaps even encouraged by the government to avoid taxes by doing things they want us to do (invest, support the housing market, creating jobs, etc.), they really frown on evading taxes.
I suggest accepting taxes as part of the equation, and move on.
Specialist · Chicago · Member since 2018 · 126 posts · 51 votes
7y
Your Dad as well as anyone can sell it to you for what it is worth and then give you the difference in what is owed and what is worth minus the capital Gains he has to pay.
Meridian, ID · Member since 2019 · 9 posts · 1 vote
7y
@Michele Wax two years ago, House was 151k. Including 32k of cash down and closing costs. Now we can sell for 230k.
Our realtor estimates that after closing costs, Dad getting his cash back, paying off the loan and everything else we would be left with about 70k in gains.
Specialist · Chicago · Member since 2018 · 126 posts · 51 votes
7y
I would definitely let him sell you the house for the amount owed (No capital gains for him). Then you can sell the house in a 1031 exchange for another property so you do not pay the Capital Gains. Does this make sense to you?
Meridian, ID · Member since 2019 · 9 posts · 1 vote
7y
@Michele Wax yeah that makes sense. But I thought my dad still has to pay tax on the potential gains because we’re family. If not capital gains then something like inheritance or estate tax. Not sure what it’s called.
Specialist · Chicago · Member since 2018 · 126 posts · 51 votes
7y
I think you need a lawyer or a tax accountant to tell you what you should do.
What I can tell you is what you should have done so this would not happen. I am not sure how you are gonna get out of all of this.
Good Luck.
Your dad might be left with a lot of legal issues. If he received rent from you and did not acknowledge it on his taxes. Also selling it to you he can give you a gift of $14,000 for each individual per year.
So, What I think is have him sell to you for what you bought it for. Then you season it for 2 years. Then when you sell for more there will be no capital gains.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
You And your need to talk to a cpa..
You can Not 1031 exchange it to avoid taxes if he sells it to you for his cost....
You can’t 1031 your primary residence
1031 is only for investment properties held long term, typically 1-2 years or more.
You Can have him sell it you for his costs (you could likely do a sub2 without a lot of risks)...if you then held it and lived in it for two years your gain would be tax free....more than 1 year, less than 2, you pay cap gains tax.
Other than that, the cleanest way is probably for your dad to sell it, give you the profit after taxes. Your dad will have two different taxes though...
Cap gains tax
Depreciation recapture tax, whether or not he claimed the depreciation (he can file for the depreciation now though, so it’s likely a wash).
What you guys Should have done is buy it your name, with him as co-signer (or in both names then QCD his interest to you.
Absolutely CPA time, for both of you Before he sells!
As we approach the 4th of July, all I can say is God Bless America! Look what you did: invested $32K with someone else's credit, and more than doubled your money in 2 years! Your gamble (and your ever-trusting Dad's) paid off.
@Michele Wax provided you with sound advice. Either find a legal way to avoid the taxes on this 'obscene' appreciation play (1031 into another investment), or pay the taxes.