How Can We Avoid Capital Gains On Transfer And Subsequent Sale Of Home
My parents want to transfer their home to me and my ex-husband and then I plan to sell my interest in it to him as soon as possible. How can we do this with the least capital gains. My parents are not eligible for homeowner exclusion. How long will I need to keep it after the transfer before selling it to my ex?[ Edited by dvnaparose on Date 07/22/2003 ]
Why aren't your parents eligible for the exclusion?
Thanks for your response Dave. They aren't eligible for the exclusion because they don't live in the home. My brother has lived there for years.
You did not ask about the potential tax consequences for your parents, but let me first give you some general information about gifts and gift taxes.
The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced interest loan, you may be making a gift.
An annual exclusion of $11K applies to gifts to each donee. In other words, your parents can each give you $11,000 and another $11,000 each to your ex-husband for a total annual gift of $44,000 (The annual exclusion applies to each separate gift). An appriaisal should be used to establish the value of the property to be gifted, and reported on your parent's Gift Tax Return. Until your parents make gifts totalling $1 million during their lifetime, there is no actual gift tax due but the Gift Tax Return is filed for information only.
The general rule is that your cost basis in the property is the same as the basis of the donor. For example, if you are given property that your parents had purchased for $100K (and that was their basis), and you later sold it for $200K, you would pay income tax on a gain of $100K.
In your example, let's say that your parent's basis in the property is $100K, and the gift is divided equally between you and your ex-husband. Your basis is now $50K. If you sell your share of the property for more than $50K, the "profit" will be taxable.
The question to ask your tax advisor is whether your parent's holding period can be "tacked on" to your holding period, so you can qualify for long term capital gains tax treatment even if you sell immediately. If the answer to this question is NO, then you must hold the property for at least one year to qualify for long term capital gains tax treatment.
If you live in the property as your primary residence for two years after title is transferred to you, then (when you sell to your ex) the profit on the sale of your share of the property is tax free.
Hope this helps.