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Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Fri May 22, 2020 10:31 pm
by need403bhelp
I have lived in a condo since early 2000's until late 2019. This condo is owned jointly by DF and me as I had no income when I purchased it. I lived there until 2019 and my father never lived there (lives in a different city, although did stay with me when he visited by himself without DM). We are selling it, expect capital gain to be ~$30,000 or so. We still have a mortgage on it also ~$50-60k. Since it was my primary residence, I won't have any income tax due on the sale if I understand correctly. What about my father? Does it matter what part of the mortgage he paid vs what part I paid? Is there any way to ameliorate any income tax due for him?

Thank you!

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 11:04 am
by BogleTaxPro
Based on what you've stated, not much of a break (keep reading). The mortgage is not relevant for the capital gains calculation/taxability. Assuming that the deed for the condo states that you are 50/50 owners, you are correct that since you've lived there 2 of the last 5 years your half of the gain is tax-free (up to $250,000 for single taxpayer). But your father's gain *will* be taxable at his lower capital gains rate, not his normal tax rate...as this is considered a long-term investment for him. So that's a slight consolation. Be sure that you are calculating your gain correctly, and not subtracting the mortgage (frequent mistake on this forum). That is:

GROSS sales price (not what you received, what the buyer actually paid)
- expenses of sale (commissions, etc. but not prepaid property taxes. those go elsewhere.)
- cost of any capital improvements (any remodelling? did you re-paint to make it more market-able?)
- expenses of purchase (if you had any back in 2000)
- GROSS purchase price
= capital gain/loss

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 11:42 am
by need403bhelp
BogleTaxPro wrote:
Sat May 23, 2020 11:04 am
Based on what you've stated, not much of a break (keep reading). The mortgage is not relevant for the capital gains calculation/taxability. Assuming that the deed for the condo states that you are 50/50 owners, you are correct that since you've lived there 2 of the last 5 years your half of the gain is tax-free (up to $250,000 for single taxpayer). But your father's gain *will* be taxable at his lower capital gains rate, not his normal tax rate...as this is considered a long-term investment for him. So that's a slight consolation. Be sure that you are calculating your gain correctly, and not subtracting the mortgage (frequent mistake on this forum). That is:

GROSS sales price (not what you received, what the buyer actually paid)
- expenses of sale (commissions, etc. but not prepaid property taxes. those go elsewhere.)
- cost of any capital improvements (any remodelling? did you re-paint to make it more market-able?)
- expenses of purchase (if you had any back in 2000)
- GROSS purchase price
= capital gain/loss
Thank you so much for the very helpful advice.

I do have the original mortgage note and settlement statement, but not a copy of the deed (I'm assuming we'll end up with one probably when selling), but we are both equal co-owners as far as I know (both equal borrowers on mortgage, both listed as equal owners in terms of property taxes, etc.).

Re your advice, two questions:
1. I actually paid for the capital improvements. Can my father subtract half? Can he subtract them all? Does it matter if the invoice is in my name or his name (currently one of the invoices is in our realtor's name for some reason despite my having paid it, but I can get this changed)?
2. Expenses of purchase - looks like this would basically be "settlement charges" on the original settlement statement, correct? For example, I'm assuming prepaid property taxes would not qualify?

Thank you!

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 12:04 pm
by trueblueky
IRS Pub 523, Selling your home, has worksheets for this.

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 1:00 pm
by spectec
Depending upon his income and other factors, his Capital Gains Tax might be anything in the range of -0- up to $3,000 (plus state taxes, if any). But after you've done everything to mitigate the tax liability, you could always offer to pay his taxes (or split them) as a way to show appreciation for his help in the first place.

My guess is he will thank you for the offer but decline, pay the taxes himself, and the bond between you will be even stronger than it is now.

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 2:45 pm
by fundseeker
If you want to see your deed, you can probably go online to your county’s probate office and see it. Scarily, almost all of them are online these days and easy for anyone to read.

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sat May 23, 2020 4:53 pm
by BogleTaxPro
need403bhelp wrote:
Sat May 23, 2020 11:42 am
Re your advice, two questions:
1. I actually paid for the capital improvements. Can my father subtract half? Can he subtract them all? Does it matter if the invoice is in my name or his name (currently one of the invoices is in our realtor's name for some reason despite my having paid it, but I can get this changed)?
2. Expenses of purchase - looks like this would basically be "settlement charges" on the original settlement statement, correct? For example, I'm assuming prepaid property taxes would not qualify?
1. Legally, the only person who can deduct the capital improvements is the person who paid for them. It's only a problem if your father gets audited and it sounds like you're not talking a whole lot of gains to start with at a low tax rate. Even though your name is on the invoice, if he were to be questioned and were to say well I paid him my half through a personal check...that would be a reasonable conclusion. Similarly, I don't think the realtor's name is a problem unless there is paperwork (like the settlement papers or a sales contract) that states that the realtor was responsible for the payment. Think through what you're willing to defend if questioned (knowing that there is a very slim chance you'll be questioned on a transaction this small).

2. As trublueky pointed out, publication 523 is a good source for this topic. https://www.irs.gov/publications/p523
Most of the settlement costs when you bought the condo were actually owed (and most likely paid for) by the seller. You can only use as an adjustment to your basis any of those costs owed by the seller that YOU paid. So if you actually reimbursed the seller for the prepaid property taxes, you could use those. But most likely, not.

And as spectec pointed out...you can always offer to reimburse him whatever capital gains tax he owes. Or split that with him as well?
(You're a good son. And he's a good dad.) :-)

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sun May 24, 2020 4:39 pm
by need403bhelp
fundseeker wrote:
Sat May 23, 2020 2:45 pm
If you want to see your deed, you can probably go online to your county’s probate office and see it. Scarily, almost all of them are online these days and easy for anyone to read.
Thanks. That worked. I just had to sign up for an account with a valid email address to see all property records in my county!

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sun May 24, 2020 5:28 pm
by ralph124cf
BogleTaxPro wrote:
Sat May 23, 2020 4:53 pm
need403bhelp wrote:
Sat May 23, 2020 11:42 am
Re your advice, two questions:
1. I actually paid for the capital improvements. Can my father subtract half? Can he subtract them all? Does it matter if the invoice is in my name or his name (currently one of the invoices is in our realtor's name for some reason despite my having paid it, but I can get this changed)?
2. Expenses of purchase - looks like this would basically be "settlement charges" on the original settlement statement, correct? For example, I'm assuming prepaid property taxes would not qualify?
1. Legally, the only person who can deduct the capital improvements is the person who paid for them. It's only a problem if your father gets audited and it sounds like you're not talking a whole lot of gains to start with at a low tax rate. Even though your name is on the invoice, if he were to be questioned and were to say well I paid him my half through a personal check...that would be a reasonable conclusion. Similarly, I don't think the realtor's name is a problem unless there is paperwork (like the settlement papers or a sales contract) that states that the realtor was responsible for the payment. Think through what you're willing to defend if questioned (knowing that there is a very slim chance you'll be questioned on a transaction this small).

2. As trublueky pointed out, publication 523 is a good source for this topic. https://www.irs.gov/publications/p523
Most of the settlement costs when you bought the condo were actually owed (and most likely paid for) by the seller. You can only use as an adjustment to your basis any of those costs owed by the seller that YOU paid. So if you actually reimbursed the seller for the prepaid property taxes, you could use those. But most likely, not.

And as spectec pointed out...you can always offer to reimburse him whatever capital gains tax he owes. Or split that with him as well?
(You're a good son. And he's a good dad.) :-)
Capital improvements are not a "deduction". They are added to the cost basis to determine the profit of the sale, no matter who paid for them.

Ralph

Re: Income tax due for DF upon selling jointly owned condo where he did not live

Posted: Sun May 24, 2020 6:38 pm
by need403bhelp
ralph124cf wrote:
Sun May 24, 2020 5:28 pm
BogleTaxPro wrote:
Sat May 23, 2020 4:53 pm
need403bhelp wrote:
Sat May 23, 2020 11:42 am
Re your advice, two questions:
1. I actually paid for the capital improvements. Can my father subtract half? Can he subtract them all? Does it matter if the invoice is in my name or his name (currently one of the invoices is in our realtor's name for some reason despite my having paid it, but I can get this changed)?
2. Expenses of purchase - looks like this would basically be "settlement charges" on the original settlement statement, correct? For example, I'm assuming prepaid property taxes would not qualify?
1. Legally, the only person who can deduct the capital improvements is the person who paid for them. It's only a problem if your father gets audited and it sounds like you're not talking a whole lot of gains to start with at a low tax rate. Even though your name is on the invoice, if he were to be questioned and were to say well I paid him my half through a personal check...that would be a reasonable conclusion. Similarly, I don't think the realtor's name is a problem unless there is paperwork (like the settlement papers or a sales contract) that states that the realtor was responsible for the payment. Think through what you're willing to defend if questioned (knowing that there is a very slim chance you'll be questioned on a transaction this small).

2. As trublueky pointed out, publication 523 is a good source for this topic. https://www.irs.gov/publications/p523
Most of the settlement costs when you bought the condo were actually owed (and most likely paid for) by the seller. You can only use as an adjustment to your basis any of those costs owed by the seller that YOU paid. So if you actually reimbursed the seller for the prepaid property taxes, you could use those. But most likely, not.

And as spectec pointed out...you can always offer to reimburse him whatever capital gains tax he owes. Or split that with him as well?
(You're a good son. And he's a good dad.) :-)
Capital improvements are not a "deduction". They are added to the cost basis to determine the profit of the sale, no matter who paid for them.

Ralph
Thank you. That is very helpful!