My wife and I are co-owners of a condo with our daughter. She is going to sell and buy a new house with her husband. Can they take all the profit and roll in into their new house?. Then can they gift us any money that we would have earned from the sale?
Who lived in the condo? Only the people who lived in the condo as a primary residence for at least two of the past five years might be eligible for an exclusion of the gains for capital gains tax. And....what they do with the money is irrelevant. The last time that mattered was 1997.
SALE OF HOUSE
If your gain was more than $250,000 filing Single, or more than $500,000 filing Married Filing Jointly the sale must be reported on your tax return. Whether you re-invested the gain in to another house is irrelevant. If you have a Form 1099-S go to Federal>Wages and Income>Less Common Income>Sale of Home (gain or loss)
If you owned and lived in the home as your primary residence for at least 2 of the last 5 years on the date of the sale, you do not have to report the home sale if the gain is less than $250K filing Single, or less than $500K filing Married Filing Jointly (and you both owned and lived in the home for at least 2 years).
- If you are using online TT, you need Premier or Self-Employed software to report the 1099-S
My wife and I are co-owners of a condo with our daughter. ... Then can they gift us any money that we would have earned from the sale?
She wouldn't be giving a gift. You would be loaning her the money to purchase the house, and she would merely be repaying that loan.
generally, each co-owner is responsible for reporting their share of the gain. however, since she has not yet sold the house, you and your spouse can make a gift of your equity in the house so that she and if you want her spouse would be the only owner(s) and thus the only one(s) reporting the gain. you would have to file gift tax returns. she would acquire the basis you and your spouse had in the home. if she were later to gift you and or your spouse money (for your shares), the IRS could legitimately take the position there was no gift and you and your spouse now owe taxes penalties and interest. this is best discussed with a real estate attorney so things are done properly.
"Can they take all the profit and roll in into their new house?"
No. Each transaction is treated according to its own rules, and what you do with the money later has no affect on the tax situation with respect to the sale. The rule about postponing tax on capital gains by rolling it over into a more expensive home was eliminated in 1997.
You need to stop and get tax advice from a qualified professional.
As it stands, you, your spouse and your child are probably each 1/3 owners of the condo. Alternatively, you and your spouse might together own half and your daughter owns half. Either way, when the condo is sold, your daughter may be able to exclude up to $250,000 of capital gains from her 1/3 or 1/2 the condo, but the capital gains due to the 1/2 or 2/3 that you own will be reported as taxable income on your tax return and the tax is due from you.
You may be able to quitclaim your share to your daughter, so the capital gains will be covered by her exclusion. That would result in a gift that might be reportable but probably won't be due gift tax.
Also, if the husband has lived in the home for 2 years (even if they have not been married for the whole time), then they may qualify to exclude $500,000 of the gain instead of $250,000, assuming they were full owners.
You need competent legal and tax advice before the home is sold.
When the house is sold, the owners must each pay their share of whatever capital gains tax is due, period. What's done with the profits after the sale has no impact on this.
If, after the sale, you give your daughter your share of the profits with the expectation of being paid back, then, as @AmeliesUncle said, you've given her a loan, not a gift. If you choose to do this, you'd be wise to do it in a formal way, with a written loan agreement.
However, if you give her your share of the profits with no expectation of being paid back, then you've given her a gift. You and your wife can each give her $17,000 in tax year 2023 without having a file a gift tax return. If your gifts as a married couple in 2023 exceed $34,000, you must file a gift tax return, IRS Form 709. (The obligation to file a gift tax return rests with the donor, not the recipient). No actual gift tax is due unless you've exceeded the lifetime gift tax exclusion amount. For 2023, the lifetime gift and estate tax exemption is $12.92 million ($25.84 million per married couple). But the IRS requires that Form 709 must be filed for informational purposes if your combined gifts in 2023 exceed $34,000.
All that said, I agree with the others that you'd be wise to obtain professional guidance through the whole process.
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