Sale of co-owned Property

[sweetsm00ch]

Hi, my parents, my husband and I co-own a property, this property is my parents primary home.

My husband and I own a property of our own which is our primary home and My parents do not own any other home besides the one being discussed.

The co-own property is being sold but my parents are buying another home which will replace the one they are currently living in. Most of the proceeds (with the exception of about $100,000 are being re-invested in the the new property. 

Will my husband and I need to pay taxes on this. 

We were asked to complete the TAX form 593 "Real Estate Withholding Tax Statement" can I select #1 as "The property qualifies as the seller's (or decedent's, if sold by the decedent's estate or trust) principal residence under IRS code Secition 121?

[MaryK4 · Accepted solution]

Yes, unfortunately, you will have to pay the capital gains tax on your share since it was not YOUR primary home. (Your parents will not).  Likewise, you should not select an exemption on the Form 593.

[sweetsm00ch]

Will I be charged taxes based on the percentage I own? The IRS form requires that I select a percentage amount.

[AmyC · Accepted solution]

Yes, you and your husband will pay taxes on your percentage ownership. While it was kind of your parents to add you to the title, had they not, they could have excluded it all up to $500,000 gain.

We see parents trying to be nice and it backfires. For example, say instead your parents had died. If they owned the whole house, you would inherit the house for fair market value. Instead, you would have had only their share at fair price and the rest as their basis in the house when they gave it to you. (It's lower of fmv or basis at time of gift, I am just assuming the house went up in value).

[sweetsm00ch]

We are on the title and mortgage loan because they attempted to refinance but they could not due to income.  However, we (my husband and I) have never made a single payment on this property.  Is it possible to state that they own 100% of it?

Now with the purchase of this new property we will no longer be on title or loan.  We do however plan on placing this property under a trust. Will that affect me in any way as taxes are concern?

[AmyC]

There are different kinds of trusts. Some trusts change character at death. Talk to a lawyer that understands trusts and estates. What a good daughter you are!

[sweetsm00ch]

As I am reading the instructions for this form (IRS 593 instructions) it talks about financial ownership.  It reads: if you are on the title for incidental purposes and you have no financial ownership, enter 0 and skip Seller/Transferor Signature. You will not be withheld upon.  Examples of Seller/Trasnferors who are on the title for incidental purposes are:

* cosigners on title (eg parents co-signed to help their children qualify for the loan) 

Would this apply to me? Can I say 0% ownership?

[AmyC · Accepted solution]

That is called taking a position. If you feel comfortable saying it and can back it up, then yes. Just understand, the IRS job is to collect taxes so be sure if you are audited, you have a solid stance. Zero percent is acceptable in some situations and yours may be one of them.

[sweetsm00ch]

Thank you soo much for your assistance.  You have been of tremendous help. 

I definitely have all documentation to back my 0% ownership. 

Once again I appreciate your assistance. Have a blessed day. 

[AmyC]

Wonderful! Blessings to you as well!