House Gift (Tax implications)

[plansimmer]

Hello!

What is the capital gains tax rate a retiree needs to pay in the following scenario,

Appraised value of home which is not primary residence - $700,000
Home purchased in year 2000 for value - $110,000
Selling home to son - $350,000 (under fair market value)
Dad Social Security income only per year - $6000
Capital gains - $350,000 - $110,000 = $240,000

Does dad have to pay $0 capital gains since his income is low from social security or does he have to pay 20% of $240,000?
This is not dad's primary residence.

Is "Dad" on Medicare?

If so, you can also anticipate an upward move in the IRMAA brackets (in 2 years) if the capital gain income pushes him across one or more IRMAA tiers.

Regards,

Thanks! Yes, around $2000 is deducted for Medicare B.

[CAsage]

Was this a rental? Then any depreciation has to be recovered (and I don't know the details, but it's a thing). NIIT applies on non-earned income above $200K for a single person, so assume another 3.8% on that gain. Hey, he's still made a lot on that property! And yes, the "undermarket" price needs to be reported on a gift form, but neither of you will pay taxes on that.

[plansimmer]

Was this a rental? Then any depreciation has to be recovered (and I don't know the details, but it's a thing). NIIT applies on non-earned income above $200K for a single person, so assume another 3.8% on that gain. Hey, he's still made a lot on that property! And yes, the "undermarket" price needs to be reported on a gift form, but neither of you will pay taxes on that.

Not a rental. Son has been paying mortgage and has lived in the house all these years with dad overseas.

[chemocean]

I am not an attorney, so I don't know what rules are about letting relatives live in your second house.

What was the arrangement between father and son besides paying mortgage, written or not? Who paid Taxes, insurance, maintenance. If son paid all expenses, then it would seem that he was building up equity in the house during its appreciation. The son equity in the house, would reduce the father's capital gains.

IF he was not building up equity, then it would seem to me that paying the mortgage was just the method of paying rent and father could have depreciated. Depreciation would need to be recaptured, whether the father took it or not.

[plansimmer]

[Thread merged into here --admin LadyGeek]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

[sailaway]

In what sense is this co owned? You say the "mortgage deed" is in his name. Is it titled in his name only?

[physics911]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

Can you clarify? You indicate your dad's name is on the deed, but you have been paying the mortgage. So is your name and his jointly on the mortgage, or is it in his name and you are just making the payment? If it is the latter, I don't see that you own any percentage of the home, other than maybe a tacit agreement with your dad. That aside, buying someone out of a mortgage, whether you are on the deed, mortgage, whatever, is perfectly legit so long as no one is doing it out of duress. In other words, as long as you and your dad both willingly agree to the arramangement, and you can pay for the house (get a mortgage in just your name), then there is no reason you can't. From a another standpoint, what is going to happen with your dad after you buy, i.e., is he going to remain living there? will he take his money and move somewhere else...?

[crre]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

it sounds like you are asking if it is legal for you to purchase your father's home. why do you think this would be illegal?

[BogleTaxPro]

Is this the same house/situation you asked about
in december 2022 and february 2023
viewtopic.php?p=7026366#p7026366
and november 2023: viewtopic.php?p=7565463#p7565463
and april 2024: viewtopic.php?p=7817674#p7817674
?

[plansimmer]

In what sense is this co owned? You say the "mortgage deed" is in his name. Is it titled in his name only?

I should have been more descriptive.
Dad and myself are in the Title. Dad is on Mortgage.

[plansimmer]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

Can you clarify? You indicate your dad's name is on the deed, but you have been paying the mortgage. So is your name and his jointly on the mortgage, or is it in his name and you are just making the payment? If it is the latter, I don't see that you own any percentage of the home, other than maybe a tacit agreement with your dad. That aside, buying someone out of a mortgage, whether you are on the deed, mortgage, whatever, is perfectly legit so long as no one is doing it out of duress. In other words, as long as you and your dad both willingly agree to the arramangement, and you can pay for the house (get a mortgage in just your name), then there is no reason you can't. From a another standpoint, what is going to happen with your dad after you buy, i.e., is he going to remain living there? will he take his money and move somewhere else...?

Thanks for your response.
Dad and myself are on the Title. Only dad is in the mortgage. He has retired and is living overseas while I have been living in the home all these years. I want to make sure he gets half of the money (minus cap gains) that is 'locked' in the property and so I'm taking the mortgage fully by doing the refinance.

[plansimmer]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

it sounds like you are asking if it is legal for you to purchase your father's home. why do you think this would be illegal?

Just paranoid
My thinking is would IRS look at this transaction differently.

[plansimmer]

Is this the same house/situation you asked about
in december 2022 and february 2023
viewtopic.php?p=7026366#p7026366
and november 2023: viewtopic.php?p=7565463#p7565463
and april 2024: viewtopic.php?p=7817674#p7817674
?

Yes, we have been fine-tuning it to see what is the best path for both me and dad to maximize money for both of us, legally of course.

[junior]

You want to refinance then purchase the home? Why is this two transactions instead of one?

[ResearchMed]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

it sounds like you are asking if it is legal for you to purchase your father's home. why do you think this would be illegal?

Just paranoid
My thinking is would IRS look at this transaction differently.

Assuming you can get the financing, etc., to actually pay for the house, it shouldn't be any different than, say, if two business partners co-owned a property, although there'd probably be some special business/inter-personal arrangements if only one was officially "on the mortgage".

As long as you are paying "fair market value", the relationship doesn't matter.
(Questions arise when someone wants to sell a house to a relative for less than fair market value, for example, which isn't your situation. In that case, there would be some sort of gifting/etc., even if it appears hidden.)

As junior asked above, why the two-step process?

And what do you mean that *you* "I would get $250,000 - $200,000" ?
If you "pay" $500k for the property, then your father would get his $250k (subject to tax, as you recognize). You would have paid off the mortgage of $200k, which is less than $250k. So why would you be needing the full $500k to purchase it?

Wouldn't you just need $450k, with $250k going to your father and $200k paying off the mortgage? (There may be some fees, etc. but this is rounded, etc.)
You would then have approximately $300k in equity in the house, at that point in time: $500k value less the $200k mortgage you have just taken out in your own name.

Yes, we have been fine-tuning it to see what is the best path for both me and dad to maximize money for both of us, legally of course.

I don't understand the issue of "maximizing" the money.
There is the market value and the mortgage amount. IF you both agree that you owned the house 50/50, then the above arrangement is what is appropriate.
I'm not clear about what "other" way this would/could be done to get more money.

RM

[Squirrel208]

The home I live in is co-owned by my dad and myself (50/50)...

So both of your names are on the warranty deed and/or certificate of title.

...but the mortgage deed is in my dad's name...

Which means that your dad (and not you) is solely responsible for repaying the mortgage used to purchase the property.

...but I have been paying the mortgage all these years.

FWIW that's pretty much irrelevant to the discussion of legality, but it does explain your motivation to change the apparently informal current financial arrangement between you and father.

I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000

The most common method for doing this involves you obtaining a new mortgage, in your name only, that pays off the existing one, releasing your dad from his previous obligation.

After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

You can't purchase something from your father that he doesn't own (i.e. your own deeded 50% interest in the property.) You also can't purchase something from yourself and then give it back to yourself.

If the fair market value for the home is $500K, and you and dad are legally 50/50 co-owners on the warranty deed, you can purchase your dad's 50% interest for $250K, which would leave you as the sole name on the warranty deed (title) and mortgage deed of trust (loan.)

I agree with the others who have suggested that doing this through multiple transactions seems unnecessarily complex and expensive. For something this complex I'd probably invest in a consultation with a real estate attorney before taking any action.

[toddthebod]

You are trying to do something that divorced couples do every day. It's not a big deal.

But if your dad has a $200,000 mortgage and owns $250,000 worth of house, I don't see how he ends up with $250,000 profit.

Even if you gift him the mortgage payoff, you have to have realistic expectations about how much you can borrow. The bank won't lend you 100% of the value of the house. If you can only borrow 80% ($400,000), how will you divide up the $200,000 leftover after paying off the existing loan?

[exodusNH]

The home I live in is co-owned by my dad and myself (50/50) but the mortgage deed is in my dad's name but I have been paying the mortgage all these years. I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000
After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

The equity is only $300,000 if the mortgage balance is $200,000. If you each own half, he's only going to get $150,000.

You'll need to get a mortgage for the $350,000 -- $200,000 to pay off the existing mortgage and $150,000 to buy your father out. You'll then have 30% equity in the house.

[LotsaGray]

Is this the same house/situation you asked about
in december 2022 and february 2023
viewtopic.php?p=7026366#p7026366
and november 2023: viewtopic.php?p=7565463#p7565463
and april 2024: viewtopic.php?p=7817674#p7817674
?

Yes, we have been fine-tuning it to see what is the best path for both me and dad to maximize money for both of us, legally of course.

But your facts and scenarios also keep changing.

Imo take all the thread starters, combine all the data and correct conflicts. Put this here as an edit to this thread starter (ivlude comment acknowledging prior threads so all know this is current and correct info). Then state what you want as the end result @nd let folks suggest methods.

BTW, selling house to relative below 50% of FMV won’t reduce cap gains owed. Cap gains will e based on the FMV and the difference between that and sale price will be a gift. Also note since it appears a foreign National not residing in US is involved it is likely more complicated on the taxation issues. Definitely include DF specific status.

[plansimmer]

The home I live in is co-owned by my dad and myself (50/50)...

So both of your names are on the warranty deed and/or certificate of title.

...but the mortgage deed is in my dad's name...

Which means that your dad (and not you) is solely responsible for repaying the mortgage used to purchase the property.

...but I have been paying the mortgage all these years.

FWIW that's pretty much irrelevant to the discussion of legality, but it does explain your motivation to change the apparently informal current financial arrangement between you and father.

I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000

The most common method for doing this involves you obtaining a new mortgage, in your name only, that pays off the existing one, releasing your dad from his previous obligation.

After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

You can't purchase something from your father that he doesn't own (i.e. your own deeded 50% interest in the property.) You also can't purchase something from yourself and then give it back to yourself.

If the fair market value for the home is $500K, and you and dad are legally 50/50 co-owners on the warranty deed, you can purchase your dad's 50% interest for $250K, which would leave you as the sole name on the warranty deed (title) and mortgage deed of trust (loan.)

I agree with the others who have suggested that doing this through multiple transactions seems unnecessarily complex and expensive. For something this complex I'd probably invest in a consultation with a real estate attorney before taking any action.

Thank you for everyone's responses!
It seems from what all of you are saying is - I can only take a loan for which I do not own and that is $250,000 and that will be my new mortgage.

[exodusNH]

The home I live in is co-owned by my dad and myself (50/50)...

So both of your names are on the warranty deed and/or certificate of title.

...but the mortgage deed is in my dad's name...

Which means that your dad (and not you) is solely responsible for repaying the mortgage used to purchase the property.

...but I have been paying the mortgage all these years.

FWIW that's pretty much irrelevant to the discussion of legality, but it does explain your motivation to change the apparently informal current financial arrangement between you and father.

I would like to re-finance and remove him from the Mortgage deed. Current Mortgage amount is $200,000

The most common method for doing this involves you obtaining a new mortgage, in your name only, that pays off the existing one, releasing your dad from his previous obligation.

After a few months, I would like to purchase the property from my dad for $500,000 (fair market value). This would enable him to get a chunk of money ($250,000 or 50%). I would get $250,000 - $200,000.
Is this legally allowed. As far as I'm concerned (with my limited knowledge on this!), I'm helping dad get some equity of the house minus the capital gains of course.

You can't purchase something from your father that he doesn't own (i.e. your own deeded 50% interest in the property.) You also can't purchase something from yourself and then give it back to yourself.

If the fair market value for the home is $500K, and you and dad are legally 50/50 co-owners on the warranty deed, you can purchase your dad's 50% interest for $250K, which would leave you as the sole name on the warranty deed (title) and mortgage deed of trust (loan.)

I agree with the others who have suggested that doing this through multiple transactions seems unnecessarily complex and expensive. For something this complex I'd probably invest in a consultation with a real estate attorney before taking any action.

Thank you for everyone's responses!
It seems from what all of you are saying is - I can only take a loan for which I do not own and that is $250,000 and that will be my new mortgage.

You need to get a loan for $350,000. $150,000 to buy your father out and $200,000 to clear the existing mortgage. You will have $150,000 of equity (($500,000 - $200,000) / 2).

[SnowBog]

You need to get a loan for $350,000. $150,000 to buy your father out and $200,000 to clear the existing mortgage. You will have $150,000 of equity (($500,000 - $200,000) / 2).

For clarity, if what you posted above is correct - you have $150,000 of equity right now. As does your father.

Again, if FMV is $500,000 with a $200,000 mortgage, that's $300,000 in equity; but split two ways (50/50 ownership), you each would currently have $150,000 in equity.

Currently, you each have a 50% ownership stake in any future equity gains, either from paying down the mortgage or further appreciation. So the question is "how much will it take to buy out your dad?"

The simplest case is he'd sell for his current equity - being $150,000. However, it's highly unlikely (and illogical) that he'd maintain a $200,000 mortgage on a house he no longer has an ownership claim (after sale), not to mention the mortgage company probably wouldn't allow the sale anyway unless they get their money.

Which means that you'd need to come up with $150,000 to buy out your dad plus $200,000 to pay off the mortgage. For the $350,000 noted in the post quoted above. (And remember, there will be costs for the loan, closing, title, etc.)

If you don't have this money, one option would be to get your own mortgage as part of the purchase of the remaining 50% of the property. Again, very common - people getting divorced have done this, as have others who've been co-owners. That's why people are commenting on making this "one transaction". The transaction being the mortgage for the purchase of the home. Again, very common. When people get a mortgage, the bank doesn't give them a big check - the bank simply agrees to pay for the planned purchase - if the purchase doesn't happen - the mortgage isn't executed. Aka - it's the same transaction.

After this transaction, you will still have the same $150,000 in equity you have now - no more, no less (assuming you have to get a mortgage for the full amount noted above). But you will have 100% of all future equity gains and 100% of all debt obligations (now $350,000 vs. $200,000) - as you'd now be the sole owner. Your dad would have "exchanged" their $150,000 equity for $150,000 in cash (minus any fees, taxes, etc. owed on their side). From your dad's perspective, they could in theory take a $150,000 "cash out" mortgage to get the $150,000 in cash while retaining 50% ownership (but their equity would have dropped to $0 as the extra debt wiped it out). If they did this, hopefully you wouldn't just blindly pay the entire mortgage payment as that's even more lopsided than things currently are...

[Cah]

Very simple, buy your dad's half out. He gets his money. You get a bigger mortgage. If they haven't changed the tax rule since the last house I sold any profit your dad has made on his half is tax free at the selling price your discussing.

[LotsaGray]

Very simple, buy your dad's half out. He gets his money. You get a bigger mortgage. If they haven't changed the tax rule since the last house I sold any profit your dad has made on his half is tax free at the selling price your discussing.

Why do you believe any gains are tax free? Note is not and never was father residence. We also do not know father citizenship. Also likely the father gifted half of property to op, but we don’t know when and I don’t know how gifts work when gifter lives outside US and might not be a citizen.

[Cah]

Very simple, buy your dad's half out. He gets his money. You get a bigger mortgage. If they haven't changed the tax rule since the last house I sold any profit your dad has made on his half is tax free at the selling price your discussing.

Why do you believe any gains are tax free? Note is not and never was father residence. We also do not know father citizenship. Also likely the father gifted half of property to op, but we don’t know when and I don’t know how gifts work when gifter lives outside US and might not be a citizen.

If the father fits the definition of owner occupied for whatever length is required it should be tax free gain. Sounds like he retired overseas so probably his current residence is no matter. If none of that is applicable. He still gets his half, pays whatever tax he owes and is no longer on the deed.

[LotsaGray]

Very simple, buy your dad's half out. He gets his money. You get a bigger mortgage. If they haven't changed the tax rule since the last house I sold any profit your dad has made on his half is tax free at the selling price your discussing.

Why do you believe any gains are tax free? Note is not and never was father residence. We also do not know father citizenship. Also likely the father gifted half of property to op, but we don’t know when and I don’t know how gifts work when gifter lives outside US and might not be a citizen.

If the father fits the definition of owner occupied for whatever length is required it should be tax free gain. Sounds like he retired overseas so probably his current residence is no matter. If none of that is applicable. He still gets his half, pays whatever tax he owes and is no longer on the deed.

Father appears to not have lived in the house since at least 2011 but maybe 2008 (details are confused). At some point, the father gifted half the house, but we don't know when. We don't know if gift tax forms were filed. Son has been living in house since at least 2011 but not paying rent. OTOH, he has been paying mortgage but how much is not known. So does allowing relative to live rent free in a house create a gift of the implied rent? Does paying the mortgage create a gift to father? Can these actions be combined such that the mortgage payment becomes rent? If so, does father need to report that as rental income? One of these I am pretty sure is a yes answer. The others I don't know.

Given father has not used as a residence in at least 10+ years, I do not believe he has an exemption on the current cap gains. But w/o knowing more about how and when the son got on the mortgage, we really don't know the right answer about gift sizes and when along with cap gains.

But the FMV being quoted is iffy to me also. In the prior threads, as recent as 5 months ago, it appears the appraised FMV was $700K. At least three times OP has quoted a FMV of $650 to $700. OP seems to believe he can deduct the current mortgage from the FMV. That is not accurate. And existing mortgage doesn't reduce cap gains nor FMV.

Reading closer, it appears (still not certain) father is a US citizen (though might have been a resident alien who has now returned home), so that, if true, would make gifting situation more clear. But until we know there are questions.

There are lots of details spread across at least 4 different threads (some of which might have been combined) and these details are not necessarily consistent. And some of those details can definitely impact the correct answers.

[LadyGeek]

Is this the same house/situation you asked about
in december 2022 and february 2023
viewtopic.php?p=7026366#p7026366
and november 2023: viewtopic.php?p=7565463#p7565463
and april 2024: viewtopic.php?p=7817674#p7817674
?

Yes, we have been fine-tuning it to see what is the best path for both me and dad to maximize money for both of us, legally of course.

plansimmer - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your updates back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and explained what's wrong.)