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Since you did not live in the home at any time you will owe capital gains taxes when the home is sold. You should be receiving a Form 1099-S for your proceeds from the sale at closing. A copy of this form is also sent to the IRS so the IRS will expect to see the sale reported on your tax return, gain or loss.
Gain or Loss = Sales Price (-) Sales Expenses (-) Adjusted Basis of the home (Purchase Price plus cost of improvements before the sale)
if you haven't yet sold, talk to a real estate attorney about gifting your share. if you do this, you'll probably have to file a gift tax return because the value will likely be over $15,000. you can't end up with any of the proceeds. if the IRS was to audit, they might try to say the gift was a sham because you got the proceeds.
You could defer (but not eliminate) the tax on the gain by investing the gain in a Qualified Opportunity Fund. If you hold the Qualified Opportunity Fund long enough you could qualify for a reduction of the tax on the gain. This is a totally new way to defer or reduce the tax on capital gains, introduced in the new tax reform law. A Qualified Opportunity Fund is a sophisticated investment, and the tax rules concerning it are not yet entirely settled. If you want to do this, you should obtain professional tax advice.
The investment in the Qualified Opportunity Fund must be made within 180 days of selling the home. You invest only the gain, not the entire proceeds of the sale.
TurboTax does not support deferring capital gain by investing in a Qualified Opportunity Fund. You would not be able to use TurboTax to prepare your tax return.
@Anonymous
Re: gifting -- I believe that the son would have to live in the house for two years after receiving the gifted ownership share in order for the entire capital gain to qualify for the exclusion.
@TomD8 The son gets his entire exclusion of gain (up to $250,000) regardless of how much of a share he owns, provided he has used the home as his main residence for 2 out of the last 5 years leading up to the sale.
I believe the gifting @Anonymous suggested was so the father could relinquish his share of ownership in an effort to avoid paying tax on his share of gain.
you may want to use TT taxcaster, to see how much taxes you would pay on the gain. a portion of capital gains and qualifies dividends are tax a 0% and amounts above that are also taxed at less than normal rates.
@tagteam -- Thanks, you are correct.
Q. How do I avoid paying massive capital gains tax?
A. By not receiving any capital gains. You let your son keep all the profit from the sale. Since it's his principal residence, he qualifies for the (up to) $250,000 capital gain exclusion ($500,000 if he's married filing jointly). As others have said, you gift him your half.
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