Question

Sale of second home with joint ownership

Forum|Forum|1 year ago
August 2, 2024
2 replies
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In 2010 my wife and I purchased a condo in Mass. In the same year we added our son as an owner (and primary resident) for "a consideration less than $100". This condo is held as joint tenants. In 2024 we are in the process of selling this condo. Starting in 2010 and for each subsequent year my wife and I have been gifting to our son our maximum annual individual gifts in the form of our share of ownership. We are estimating that in tax year 2024 there will be a capital gain of about $200,000. (Purchase of $180K plus renovations of $85K and closing costs of $30K; with selling price at $600K). Do we need to file also file a Gift Tax return in 2024 or do we now have no capital gains on this sale since our 2/3rds ownership has since past to our son (by year 2022)?

Thanks

M-MTax

If you and your wife have been gifting the maximum amount to your son in the form of a fractional interest in the condo you probably have it covered by now.......he would own the property in severalty. You should execute a QC deed and find a lawyer to handle that.

O

Opus 17

Employee

You may need to see a tax professional.

Assuming your adjusted cost basis is $295K as you say (but be careful, not all closing costs from the purchase are allowable adjustments to basis, see publication 523). https://www.irs.gov/pub/irs-pdf/p523.pdf

And assuming your total gifts of equity are $194,700 (exactly 2/3, but you need to determine how much it actually is).

Then at the present time, your son owns 2/3 the home and you own 1/3 the home. If you sell for $600K (and assuming a 6% commission) the adjusted selling price is $564K.

But your son owns 2/3. So he reports a capital gain of $372K (2/3 the proceeds) minus $194K (2/3 the basis) equals $178,000. Because he does not live there, he owes full capital gains tax on this gain. Your gain is 1/3 the total, because you own 1/3, and your gain is covered by the $250,000/$500,000 exclusion on gain from a personal residence.

And, if your son lives in a different state, he will need to file a Mass non-resident return to report this income in Mass because it is Mass-source income. He will also report the gain in his home state. His home state should give him an offsetting credit for taxes paid in Mass to reduce the impact of double taxation.

M-MTax

I'm not sure how you did the math but in 2010 the annual gift tax exclusion was $13k. For both parents that would be $26k. In 2011 and 2012 you might add another $26k per year. The total at the end of 2012 could be $78k. From 2013-2017 the exclusion would have been $28k per couple (total of $140k) and 2018-2021 it would have been $30k per couple. I'm not going to continue because I think it's clear that by 2024 they would have given away their entire interest in the property to the son.

Might want to execute a QC deed to the son before the sale. No gift tax return if the 2/3 interest had been entirely gifted under the exclusion each year since 2010.

O

Opus 17

Employee

@M-MTax wrote:

I'm not sure how you did the math but in 2010 the annual gift tax exclusion was $13k. For both parents that would be $26k. In 2011 and 2012 you might add another $26k per year. The total at the end of 2012 could be $78k. From 2013-2017 the exclusion would have been $28k per couple (total of $140k) and 2018-2021 it would have been $30k per couple. I'm not going to continue because I think it's clear that by 2024 they would have given away their entire interest in the property to the son.

Might want to execute a QC deed to the son before the sale. No gift tax return if the 2/3 interest had been entirely gifted under the exclusion each year since 2010.

The gifts add up to more than the cost, but not more than the FMV at the time of sale (stated as $600,000). My tax calculation relies on their statement that the son owns 2/3. That may or may not be correct, it's up to them to support that with evidence.

The real problem is that giving the property to their son turns a non-taxable sale of a personal home for the parents, into a taxable sale for the son.

I would rather suggest the son give the home back to the parents, so they could sell the home and use the exclusion, and then parents give their son whatever amount of money they think is appropriate. The gifts must be reported but won't be taxed unless the parents' lifetime gifts are more than $13 million. Unless the parents already have gifts more than that amount, in which case they really should be working with a tax professional.

The parents probably should see a tax professional ASAP if they want to find a legal way to avoid hitting their son with $25,000+ in capital gains taxes.