Our house is financed in my mother in laws name. We are wanting to sell and buy a new in our name. What do we need to be aware of from a income tax purpose?

[white-tressie]

When we bought our house, our credit wasn't in the best of shape so we financed it in my mother in laws name as she is disabled/retired and does live with us. Now we are wanting to sell and buy a new house in our name. My concern is if we sell this house the check will be made out to my Mother in law since it is in her name.  Will she be able to give that money to us to put towards our new house or will we have to pay taxes on it?  Will she have some sort of penalty for giving us the funds? Does the full amount have to go back into the new house?

[Carl]

I understand the mortage is in the Mother-in-law's name. What about title on the house? Is your name on it? Or is only the in-law's name on it?

[white-tressie]

it is in my Mother-in-law's name as well.

[Critter]

So it is ONLY in the MIL's name?

[SweetieJean]

A few months ago, you asked about whether your mother could claim you as a dependent.  How long have you all lived in this house.

[white-tressie]

Yes it is only in MIL's name. I didn't ask if she could claim me, I asked if we could claim her.  She has lived with us for several years now. Wanting to say since 2008.

[SweetieJean]

Your prior Q said:  "Can My Parents Claim Me?"
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3212930-can-my-parents-claim-me-i-was-a-full-time-student-for-1-se...>

[SweetieJean]

In your prior Q, you said  "My parents pay for over half my cost of living."  This is confusing if you have lived with your inlaw for 8 yrs now.

[white-tressie]

I am sorry for the confusion - I just realized I signed in with my son's id instead of mine. No wonder you are confused.

[white-tressie]

To clarify - My MIL has lived with us for about 8yrs.  We pay all house payments & utilities, taxes etc, but the house is in her name.

[Critter]

""I am not knowledgeable about what affect the fact that you have lived in the house might have on the exclusion.""

There is no effect.

[Texas Roger · Accepted solution]

There is nothing in the transaction that you describe that would result in you or your spouse having to pay any taxes. Your mother in law can give each of you up to $14,000 without having to do anything regarding federal taxes. If she gave you more, she would have to file a gift tax return but still would likely not owe any taxes. She would not have any penalty. She would not be required to put any certain amount into a new house.

The only issue that could result in taxes for anyone is whether or not your mother in law would qualify for the capital gains exclusion for any capital gains on the sale of the home. She must have lived in the home of 2 of the last 5 years before the house is sold in order to qualify for up to $250,000 of capital gains exclusion from federal taxes. I am not knowledgeable about what affect the fact that you have lived in the house might have on the exclusion.

There could be some issues with a new mortgage lender regarding the gift. There are some special procedures that most lenders require to be followed regarding the timing of gifts and assurances that they are gifts and not loans.

[Carl]

Basically, you have two completely different things going on here. First, it doesn't matter whose money paid for the house you are living in now. Your MIL owns it, and your MIL can sell it. You can't. Assuming your MIL has lived in the house for at least 2 of the last 5 years, she will qualify for the $250,000 capital gains tax exclusion on her tax return. So depending on the gain when she sells the house, it's perfectly possible that no taxes will be due on the gains. I just can't see that much of a gain on a house that she's owned over the last 8 years, considering the state of the economy during that time.

Once your MIL sells the house, she can then give you the money from the gain, and it will be considered a gift from your MIL to each of you. She can give each of you a maximum of $14K for a total of $28K and no tax reporting is required. If she gives more than $14K to either of you, then your MIL is required to file a gift tax form with the IRS and your MIL pays that gift tax. One thing that can help if the total gain to be given to both you and your wife exceeds $14K for each of you, is to give you each $14K in December of 2016, then give a maximum of another $14K to each of you in January of 2017. That way, no tax reporting is required and no gift tax has to be paid.

Regardless of the amount your MIL gives to you, the recipient of the gift does not have to report one penny of it to the IRS, and does not have to pay any taxes on it.

[Texas Roger]

Your mother in law would not owe any gift tax on the excess gift over $14,000 per person per year until she has given away a total of $5.43 million during her lifetime.

[SweetieJean]

"she is disabled/retired"

If she is receiving Supplemental Security Income or any type of public assistance, then the sale proceeds could impact those benefits.