Transfer equity from sale of real property into second home

[cashmir316]

Hello,

My wife and I got married this year 2023 and we each have had a home in our names individually.  We sold my wife's house one week after we got married this year (equity from sale less than amount to trigger CapGains), but she also has another house deeded to her free and clear last year 2022 from her mother.  We are looking to sell that home, use the proceeds to buy a new house my wife and I will live in, then move her mom into our current house.  Looking for any advice on the least amount of tax implications and if our current home can/should be setup as an investment property to pay minimal taxes.  Thanks!

[Bsch4477]

There are several tax implications. 
1.  If your wife received the home as a gift, her mother should have filed 709 gift form for 2022. 
2.  If your wife sells that home her cost basis is her mother’s adjusted cost basis (if it was a gift) so there may be a large capital gain when that property is sold. 
3.  Whether you should convert your home to a rental for the mother is beyond what this forum can offer since that decision must be made in view of your entire financial situation and goals. 

[NCperson]

@cashmir316 - why did your mother-in-law deed the home to her daughter? what was the objective to doing that? 

Had that not occured, your mother-in-law could have sold the home and taken advantage of the capital gains exclusion (assiming she lived in and owed the home for 2 of the past 5 years).

On your current home, you have to 'run the numbers" and decide how long you'd continue to own the home.  Remember, you presumably have lived in the home 2 of the last 5 years and can get the exemption from the 1st $250,000 of capital gains, but once you rent and more than 3 years goes by,  you can no longer qualify for the exemption (without going back and living in that same home for up to 2 years). 

[cashmir316]

Thank you, we have worked with our real estate attorney and decided it will be deeded back to the mom, then sold, and pay the any small capital gains on the sale (unless the exemption still applies which we were told it will).

[cashmir316]

@NCperson

The objective was to protect the home from any future entities such as Medicare trying to force the sale of the home and using the equity for long-term care needs if any.  The home not being in her mom's name will prevent that after a waiting period.

[NCperson]

@cashmir316  understood 

note that for the capital gains exemption to work, not only do you have to live in the home 2 of the past 5 years, you also need to own it for a 2 years of the past 5 years.  While you MIL may have lived in the home for 2 of the past 5 years, she may  not able to meet the 2 year ownership requirement until 2 years after the deed is back in her name.  See page 3.

https://www.irs.gov/pub/irs-pdf/p523.pdf 

That stated, best to estimate her tax situation.  It could be there is no capital gains in any event.  Depends on her income.  At lower income levels, the capital gains tax is zero in any event.  Use this calculator to assess: 

https://www.dinkytown.net/java/1040-tax-calculator.html

[tagteam]

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@NCperson wrote:

....she may  not able to meet the 2 year ownership requirement until 2 years after the deed is back in her name.

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Note that the 2 years (out of 5) do not have to be consecutive.

See Section 1.121-1(c)

...The requirements of ownership and use may be satisfied during nonconcurrent periods....

[NCperson]

@tagteam which is why I wrote 'may'... 😀

agree it doesn't have to be consecutive