Minimizing tax liability on home sale/transfer

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Schooly D
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Joined: Mon Jul 23, 2007 2:00 pm
Location: North Carolina

Minimizing tax liability on home sale/transfer

Post by Schooly D »

Bogleheads,

My parents, both in their late 70s, own a house they have lived in for 35 years. The mortgage is long since paid off. Within the next year or so they expect to move to a local retirement community. I live with my wife and kids in the same city as my parents. When they move, one of two things could happen. They could sell the house, in which case we'd want to figure out how to minimize the tax liability on the capital gains, which may be considerable. The house was purchased in 1979 for around $100K and would probably sell today for around $700K. Alternatively, my parents could either retain ownership of the house after moving or transfer it to me and my sibling. Here, too, we would want to minimize any tax liabilities that my parents or I would incur resulting from the transfer.

Where can I find information that will help us choose the best course of action?

Many thanks,

David
Cheers, | | David
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Steelersfan
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Re: Minimizing tax liability on home sale/transfer

Post by Steelersfan »

The capital gains tax may not be as much as you think:


What's the best tax break available to Jane and John Q. Public? If they're homeowners, it's selling their house.
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.



Plus if they've done any improvements to the property and have records to support that, those can be deducted from the sales price.
HouseStark
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Location: Minneapolis, MN

Re: Minimizing tax liability on home sale/transfer

Post by HouseStark »

I agree that the taxable gain may be less than anticipated when factoring in the main home gains exclusion. If a house has been owned for that long it would seem likely there were some capital improvements over that period which could be added to the basis. It would be worth compiling that information to determine its implications on the gain. Also, selling expenses will reduce the taxable gain. Using 5% of a $700,000 selling price as expenses would give a reduction of $35,000 in gain.
sscritic
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Re: Minimizing tax liability on home sale/transfer

Post by sscritic »

Where do you find such cheap real estate agents?

Figure closer to 8 or 10% for all the expenses, including transfer taxes (see thread from earlier today). 700,000 minus 8% = $644,000 realized. Minus $100,000 basis results in $544,000 of gain. Exclude $500,000, and you are down to $44,000. If you can get rid of their other income for the year, the tax should be zero on the long term gain. At worst, you are looking at 15% of $44,000 or $6,600. Get that basis up a little, and some of that will disappear.
freddie
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Re: Minimizing tax liability on home sale/transfer

Post by freddie »

It is all if you want the house or not. At most your looking at like 25k in taxes and more likely 0. If you decide you want the house you could do slightly less than market (very common for FSBO since you avoiding paying agents) and potentially seller financing (i.e. you pay your parents instead of a bank). The downside of transferring is that it might reset some tax treatments if you area has breaks for seniors and/or long term residents.
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