@terimac4 wrote:
I paid them $65K. It was recorded that I bought the house from them for the $65K. (That was the remaining amount they owed).
Part of the value of the home was a gift to you. Suppose the market value was $300,000 last year, with a $65,000 mortgage. Their equity was $235,000. If you only assumed the mortgage, then you paid $65,000 to your parents, and you got a gift of equity of $235,000. This has implications for your parents and yourself.
Parents: They must file a gift tax return to report the gift. This is form 709, and was due April 15, 2024 for a 2023 gift. Payment of gift tax is not actually required unless your parents total lifetime gifts are more than $13 million, but the report must be made. Form 709 is filed separately, not part of a regular tax return.
Yourself: Your cost basis in the property is whichever is greater: the price you paid, or your parents's adjusted cost basis, but never more than the fair market value at the time of the transfer. Your parents' adjusted cost basis is the price they originally paid, plus any improvements they made, minus any casualty losses or business use depreciation they claimed. (If your parents do pay gift tax, the amount of the gift tax is also added to your basis.) Your parents' cost basis has nothing to do with the value of the property or the amount of outstanding mortgage.
https://www.law.cornell.edu/cfr/text/26/1.1015-4
When you sell, your capital gains is the difference between the selling price and your adjusted cost basis. If you sell in less than 1 year, that is a short term capital gain taxed as ordinary income. If you sell after one year, that is a long term capital gain taxed at a lower rate. If you are selling for one of the reasons listed in publication 523, you may qualify to exclude part of the gain from taxation.
https://www.irs.gov/pub/irs-pdf/p523.pdf
The provision to postpone your gain by reinvesting in another house was eliminated from the tax code in 1997 and replaced with the personal exclusion using the 2 year/5 year rule.
