Assuming a mortgage from family/capital gains - Posted by Christine

Posted by The Baze on May 10, 2000 at 08:20:58:


If your father in law was depreciating the home @ $1700 per year for 12 years, there’s your gain. The basis of the home has been reduced by $20,400 ($1700 x 12). If you assume a mortgage in excess of the home’s basis, the excess of the mortgage balance over the basis is gain. Here’s the kicker. All of the depreciation that was claimed has to be “recaptured”. It will be taxed at 25%.

Tom Bazley

Assuming a mortgage from family/capital gains - Posted by Christine

Posted by Christine on May 09, 2000 at 10:48:34:

I have rented (paid the mortgage) on my mother-in-laws home for 12 years. We had talked about assuming the loan, just to sell it in order to buy a new home with any profit as a downpayment. At first, my inlaw agreed for us to assume, with no money down, except for the assumption fees…since my husband and I always did the upkeep. Later, we decided it was an uneccesary step, and that we could just sell it in their name, and that they would just give us any profit to go toward our new home. Now, they are telling us their is an almost 10,000 dollar capital gain???tax, which they want US to pay, or take out of the profit. Unfortunately, the house needs some foundation work and I do not thing that the profit would exceed 10,000 by much if at all. If I still assume, do IIII owe the previous capital gain when I sell? Is there a way for THEM to get out of the capital gain tax or reduce it? I am upset, as I have put money into the house myself, but it is not in my name and now with this tax, I may not come out ahead, to be able to put a down payment on a new house. Any advice? should I assume…or walk away?

Re: Assuming a mortgage from family/capital gains - Posted by Bud Branstetter

Posted by Bud Branstetter on May 12, 2000 at 20:51:25:

There are two things working here. The first is the recapture of depreciation that is due in the year of sale. The second is the gain on the sale over what the basis(original cost) was. An installment sale helps on the capital gains issue. It does not help offset the recapture taxes due. If they sell to you at a price that offsets the depreciation taken you could then live in the property for the two years and exclude the recapture gain also. You do need a competent professional to guide you.

If the inlaws do not have a large estate they may be able to gift it to you. While there is a 10K per year exclusion on gifts there is also a large $660K deduction lifetime. While this is usually done at the time of dead it can be used earlier if desirable. By placing title in your name at the reduced basis you then have the two years to live in the property to exclude gain when you sell.

Do you want to own this home? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on May 09, 2000 at 23:16:46:

You have invested a lot of time and certainly money in this home. Do you wish to remain in it and actually own it? What is owed against the home by your folks if anything? Are they willing to be flexible?

There are a couple of options for you folks to consider;

  1. Have them sell you the home and agree to carry the financing for you in the form of a land contract or mortgage, deed of trust, etc.

A) if they choose to hold on to that mortgage then the tax treatment is consider an “installment sale” and they will pay tax on principal repaid to them each year from the payments. The interest income will also be taxable to them as well but there will be no large capital gains “tax bite”.

B) If they wish to have a lump sum of cash, then they can choose to sell that mortgage they would be carrying and convert it into cash. Again this may minimize there tax liability on any capital gains.

  1. Since they have been renting the home to you, they can choose to do a delayed exchange or tax defferred exchange (IRC 1034 & IRC 1031)which under the internal revenue code allows them to sell to you for CASH, have the cash held beyond their constructive receipt by a third party intermediary, and then have 45 days in which to designate and up to 180 days to close on a “replacment property” or properties. The replacment property must be considered “like kind” . In this scenario they avoid paying any tax on any gains they may have in this home and move their basis to a new stepped up basis in the replacment property. (It is best to consult with a competent tax advisor on this type of transaction).

If you do intend on buying make sure you get that foundation issue checked out in depth. That could be a very costly repair to make.

To your success,

Michael Morrongiello

Re: Do you want to own this home? - Posted by Christine

Posted by Christine on May 10, 2000 at 07:46:00:

Michael, thank you for your response. Apparently for the last 12 years my father in law was writing this house off as rental property on his taxes, depreciating it 1700.00 every year. He now tells me, that if I want to assume the loan, I have to pay the capital gains tax which is almost 10,000.00…I thought capital gains was “profit” after the sale of a home. Where does this 10,000 figure come in. The problem is, if we sell it now, and have to pay that tax, we will probably not profit anything. We wanted to sell the home, and use the profit as a down payment on another home. Any advice?

Capital Gains Tax - Posted by Sean

Posted by Sean on May 10, 2000 at 08:31:31:

A capital gain comes from when you realize a gain in the value of something you bought. For example if your parents bought the house for $30,000 and now it’s worth $130,000 they’ll have a $100,000 gain and be liable for capital gains taxes on that amount of approximately $15,000.

If they are anxious to avoid this tax they can either move into the house and live there for two years before selling or they can attempt a tax-deferred exchange where they will sell that house and buy another property of “like kind.” In this case that would mean another rental property like a house to be rented out or a duplex or apartment building. As Michael recommended you should speak with a tax professional to guide you through the pitfalls if you decide to go this route.

A third possibility is for your family to place the house in a kind of a land trust, corporation or limited liability company where there are a certain number of “shares.” Your family can give you, I think, up to $10,000 a year tax-free in the form of a gift which would be as simple as giving you some of those shares. Again you should speak to a tax professional on the pros and cons of this idea.

Good luck!