Real estate sale question

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listedguru
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Joined: Mon Aug 17, 2015 1:05 pm

Real estate sale question

Post by listedguru »

My wife and I fronted the in laws money to buy a condo about 6 months ago while they listed and sold their house. The sales process took longer than anticipated but finally 6 months later they close on selling their house on Monday. They are going to pay us back the money that we fronted them for the purchase with the proceeds from the sale. My question is should they just cut us a check after they get their funds from closing? Or the realtor mentioned possibly having the title company cut my wife and I a check at closing. That would require the title company cutting two checks - one to us and the balance to my in laws. I just want to make sure we do this right.

Correct me if I'm wrong but my in laws won't owe and capital gains taxes on the sale of their house correct? They lived in it for 40+ years. Also my wife and I won't have any tax obligations or reporting to do from this entire process correct - all we did was front them the money to buy their condo and they are paying us back with the sales proceeds.

Please advise,

-Guru
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dm200
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Re: Real estate sale question

Post by dm200 »

listedguru wrote: Thu Mar 08, 2018 10:52 am My wife and I fronted the in laws money to buy a condo about 6 months ago while they listed and sold their house. The sales process took longer than anticipated but finally 6 months later they close on selling their house on Monday. They are going to pay us back the money that we fronted them for the purchase with the proceeds from the sale. My question is should they just cut us a check after they get their funds from closing? Or the realtor mentioned possibly having the title company cut my wife and I a check at closing. That would require the title company cutting two checks - one to us and the balance to my in laws. I just want to make sure we do this right.
Correct me if I'm wrong but my in laws won't owe and capital gains taxes on the sale of their house correct? They lived in it for 40+ years. Also my wife and I won't have any tax obligations or reporting to do from this entire process correct - all we did was front them the money to buy their condo and they are paying us back with the sales proceeds.
Please advise,
-Guru
Did you have any kind of loan agreement for the money you "advanced" them?

If everything was "informal", then couldn;t they just write you a check for the money you advanced?
cadreamer2015
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Re: Real estate sale question

Post by cadreamer2015 »

Whether or not the in-laws owe capital gains taxes most probably depends on whether they have a capital gain of more than $500,000. Assuming they have lived in the home 2 of the last 5 years, I believe there is still an exclusion of $500,000 (joint return) of capital gains on a principal residence home. If they have a capital gain in excess of that amount, then they will owe capital gains tax on the excess.
De gustibus non est disputandum
barnaclebob
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Re: Real estate sale question

Post by barnaclebob »

I'd have the title company wire the money. That is instant vs taking up to a week for the money to clear by check. But your inlaws can just cut you a check too after it get cleared into their account.
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dm200
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Re: Real estate sale question

Post by dm200 »

barnaclebob wrote: Thu Mar 08, 2018 11:15 am I'd have the title company wire the money. That is instant vs taking up to a week for the money to clear by check. But your inlaws can just cut you a check too after it get cleared into their account.
It probably depends on details, but I would lean towards just having the inlaws write you a check. Why have the title company involve you when it is not necessary?
Topic Author
listedguru
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Re: Real estate sale question

Post by listedguru »

There was no "formal" agreement between us and the in laws when we loaned them the money. I think the advice here is wise to just have the title company cut a check to my in laws who can in turn cut us a check.

Also they for sure lived in the house they sold for 2 or more years out of the last 5 and their "profit" would be under $500K so it sounds like no capital gains tax is due.

Thanks for all the speedy replies,

-Guru
not4me
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Re: Real estate sale question

Post by not4me »

Seems as if details are always lurking, but I think I'd lean toward getting the check from the in-laws. Especially if the title company wanted your personal info over/above which bank to send it to.

As for whether there is a taxable gain....I think there are about 5 criteria to consider, but I don't recall them all. Sounds like they won't. Most cases that do have gains over $500K, haven't lived there long enough, sold other houses recently & used the exemption, etc.

But, even if they don't owe taxes, they would have to report it if a 1099-S were issued. I don't know if that would be triggered by cutting you a check or not. You don't want to be in a situation where the IRS thinks you may have an unreported gain! Also, there might be considerations about forgiven interest on the "loan" if other gifts have occurred.
Topic Author
listedguru
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Re: Real estate sale question

Post by listedguru »

not4me wrote: Thu Mar 08, 2018 11:51 am Seems as if details are always lurking, but I think I'd lean toward getting the check from the in-laws. Especially if the title company wanted your personal info over/above which bank to send it to.

As for whether there is a taxable gain....I think there are about 5 criteria to consider, but I don't recall them all. Sounds like they won't. Most cases that do have gains over $500K, haven't lived there long enough, sold other houses recently & used the exemption, etc.

But, even if they don't owe taxes, they would have to report it if a 1099-S were issued. I don't know if that would be triggered by cutting you a check or not. You don't want to be in a situation where the IRS thinks you may have an unreported gain! Also, there might be considerations about forgiven interest on the "loan" if other gifts have occurred.
Yeah I'm for sure just going to have the in laws cut me a check at this point. That's a good point you bring up about the IRS possibly thinking we would have an unreported gain (which we don't) but why even risk it. I'm positive they won't have to pay capital gains tax but like you mentioned it will probably still need to be reported on 2018 taxes. No other "gifts" occurred and we didn't charge them any interest on this loan so I don't think we have anything to worry about as far as gifting goes, etc. I guess they just cut us a check for the correct amount and we're done with it.

Thanks again all,

-Guru
soupcxan
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Re: Real estate sale question

Post by soupcxan »

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Last edited by soupcxan on Fri Mar 09, 2018 9:22 am, edited 1 time in total.
LarryAllen
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Re: Real estate sale question

Post by LarryAllen »

soupcxan wrote: Thu Mar 08, 2018 12:20 pm Legally, you now owe income tax on the imputed income you should've received from the loan, and since you didn't collect it, that imputed income is also a deemed gift to the other party.

https://www.nationalfamilymortgage.com/afr-rates/
In theory but in practice nobody would file a 709 for that. In particular since the imputed interest is most likely below the annual gifting limits it's a moot point.

However, you might do a one page promissory note to document the transaction just in case anybody ever asked.
soupcxan
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Re: Real estate sale question

Post by soupcxan »

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Last edited by soupcxan on Fri Mar 09, 2018 9:21 am, edited 1 time in total.
Topic Author
listedguru
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Re: Real estate sale question

Post by listedguru »

soupcxan wrote: Thu Mar 08, 2018 12:30 pm
LarryAllen wrote: Thu Mar 08, 2018 12:25 pm
soupcxan wrote: Thu Mar 08, 2018 12:20 pm Legally, you now owe income tax on the imputed income you should've received from the loan, and since you didn't collect it, that imputed income is also a deemed gift to the other party.

https://www.nationalfamilymortgage.com/afr-rates/
In theory but in practice nobody would file a 709 for that. In particular since the imputed interest is most likely below the annual gifting limits it's a moot point.

However, you might do a one page promissory note to document the transaction just in case anybody ever asked.
Even if you don't have to file the gift tax form, you still owe tax on the imputed income. Not reporting that is tax fraud.
Wow I have never heard of this. So even though you loan someone money at 0% interest you have to pay tax on the imputed income? What a great country we live in, lol.

Has anyone else done a deal similar to mine. Is this something I should worry about?

-Guru
c1over8
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Re: Real estate sale question

Post by c1over8 »

soupcxan wrote: Thu Mar 08, 2018 12:30 pm
LarryAllen wrote: Thu Mar 08, 2018 12:25 pm
soupcxan wrote: Thu Mar 08, 2018 12:20 pm Legally, you now owe income tax on the imputed income you should've received from the loan, and since you didn't collect it, that imputed income is also a deemed gift to the other party.

https://www.nationalfamilymortgage.com/afr-rates/
In theory but in practice nobody would file a 709 for that. In particular since the imputed interest is most likely below the annual gifting limits it's a moot point.

However, you might do a one page promissory note to document the transaction just in case anybody ever asked.
Even if you don't have to file the gift tax form, you still owe tax on the imputed income. Not reporting that is tax fraud.
You still owe tax on imputed income, unless you qualify for an exception, see Pub 550, https://www.irs.gov/publications/p550
Exceptions to reporting OID as current income. The OID rules discussed in Pub 550 do not apply to the following debt instruments...
5. Loans between individuals, if all the following are true.
a. The lender is not in the business of lending money.
b. The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less.
c. Avoiding any federal tax is not one of the principal purposes of the loan.
Limit on forgone interest for gift loans of $100,000 or less. For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement.
LarryAllen
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Re: Real estate sale question

Post by LarryAllen »

listedguru wrote: Thu Mar 08, 2018 1:14 pm Wow I have never heard of this. So even though you loan someone money at 0% interest you have to pay tax on the imputed income? What a great country we live in, lol.

Has anyone else done a deal similar to mine. Is this something I should worry about?

-Guru
It still is a great country. The problem is rich people abused things by doing huge "loans" without interest to family members. In reality, of course, they were gifts. So the gov had to close that loophole. The problem is the laws snare regular people too. I would talk to your tax or legal professional so you feel comfortable with whatever you file or don't file.
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