Can ownership interest be converted to mortgage to avoid taxes?

[Jeff Pollack]

Hi all, 

Here is my situation. Way back when my wife and I purchased our 1st house my in-laws helped with our down payment to reduce our mortgage. As such, my mother in law (father in law is deceased) now owns 17% if our property. We have now bought a new property and will move in after renovation. We will then sell our current property. My mother in law's 17% ownership has doubled in value from  $115k to $280k. Can the presumed capital gain of $165k be converted before sale next year into a mortgage secured by the property  to avoid taxes and have the secured property changed to our newly purchased property? 

[Michael Plaks]

@Jeff Pollack

Let's clarify the intentions first. Your portion of capital gain is already $800k, of which only $500k is exempt, so $300k is taxable. If your mother-in-law's interest is somehow converted to a secured lien, than you'd be 100% owners. Such move will *add* her $165k to your $300k taxable gain. That is counter-productive.

Which leaves only a 1031 option on the table. One sticky issue here is the investment intent, as @Dave Foster pointed out. But before we go there, keep in mind that a 1031 will require that your mother-in-law remains a part-owner of your *new* house - something that may be neither desired (she is not getting paid) nor practical (complications of securing a new mortgage).