Solved: Gift of Equity and Capital Gains tax
Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
TurboTax has you covered during Covid. Get the latest second stimulus info here.
cancel
Showing results for 
Search instead for 
Did you mean: 
Level 1

Gift of Equity and Capital Gains tax

My parents are selling their house (no mortgage) to my cousin. He has rented for 2 years with rent to own option. Agreed price was $115K and he's paid down to $107K. 

Based on this info, does anyone know if they will have any capital gains tax from the sale? Or do I need to provide more info to determine.

1 Best answer

Accepted Solutions
Level 15

Gift of Equity and Capital Gains tax


@teg2k wrote:

Market value = $110,000

Bought for $24000 (in 1977)

Formal rental agreement, declare income

Lived there 41 years

Cousin has rented for 2 years this August - will not be 3 years

Thanks so much for any insight!


Since the home is being sold at (or slightly above) market value, the concept of a gift of equity doesn't enter into it.

 

Your parents will owe recapture of depreciation but no other capital gains tax.

 

When your parents put the home in service, they should have claimed depreciation.  The basis of depreciation is their cost basis, or FMV at the time, whichever is lower.

 

Their cost basis is the price they paid in 1977, plus the cost of any permanent improvements or upgrades (which I forgot to ask about), such as a new furnace, new roof, or other remodeling.  Let's assume that there were $10,000 of improvements so their cost basis in 2017 was $34000.

 

They were entitled to claim depreciation over 27.5 years during the rental, so about $1236 per year.  (They will need to provide exact numbers.)  When selling, they must pay tax on depreciation they previously deducted or could have deducted as a rental expense.

 

Then, if they owned the home at least 2 years (yes) and lived in it for at least 2 years (yes) ending not more than 3 years before the sale (yes), then the first $500,000 of capital gains is excluded from income.

 

The math works like this.

Original cost basis minus depreciation = 34,000 - (1236 x 2 years) = 31,528.

Selling price $115,000.

Capital gains = $83,472.

The first $2472 of capital gains is depreciation recapture, it is taxed as ordinary income with a maximum tax rate of 25%. 

The remaining $81,000 of capital gains is covered by the homeowner exclusion and is non-taxable. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

3 Replies
Level 15

Gift of Equity and Capital Gains tax

More information is needed.  What is the actual market value and what did they pay when they bought it?  Also, are they treating this as a formal rental and declaring the income on schedule E, or is it an informal family thing.  How long did your parents live in the home as their main home and will it be more than 3 years (1095 days to be precise) from the day they moved out to the day they will close the sale with the cousin?

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 1

Gift of Equity and Capital Gains tax

Market value = $110,000

Bought for $24000 (in 1977)

Formal rental agreement, declare income

Lived there 41 years

Cousin has rented for 2 years this August - will not be 3 years

Thanks so much for any insight!

Level 15

Gift of Equity and Capital Gains tax


@teg2k wrote:

Market value = $110,000

Bought for $24000 (in 1977)

Formal rental agreement, declare income

Lived there 41 years

Cousin has rented for 2 years this August - will not be 3 years

Thanks so much for any insight!


Since the home is being sold at (or slightly above) market value, the concept of a gift of equity doesn't enter into it.

 

Your parents will owe recapture of depreciation but no other capital gains tax.

 

When your parents put the home in service, they should have claimed depreciation.  The basis of depreciation is their cost basis, or FMV at the time, whichever is lower.

 

Their cost basis is the price they paid in 1977, plus the cost of any permanent improvements or upgrades (which I forgot to ask about), such as a new furnace, new roof, or other remodeling.  Let's assume that there were $10,000 of improvements so their cost basis in 2017 was $34000.

 

They were entitled to claim depreciation over 27.5 years during the rental, so about $1236 per year.  (They will need to provide exact numbers.)  When selling, they must pay tax on depreciation they previously deducted or could have deducted as a rental expense.

 

Then, if they owned the home at least 2 years (yes) and lived in it for at least 2 years (yes) ending not more than 3 years before the sale (yes), then the first $500,000 of capital gains is excluded from income.

 

The math works like this.

Original cost basis minus depreciation = 34,000 - (1236 x 2 years) = 31,528.

Selling price $115,000.

Capital gains = $83,472.

The first $2472 of capital gains is depreciation recapture, it is taxed as ordinary income with a maximum tax rate of 25%. 

The remaining $81,000 of capital gains is covered by the homeowner exclusion and is non-taxable. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

View solution in original post

Dynamic Ads
v
Privacy Settings