Capital gains taxes on second home (loan, purchase, tax, money)

[LoyolaCub68]

Ok, first the situation. Currently, my wife and I are living in a condo that is owned by her father. We have been living here for 2 years together, and she has been living here for about 6 years. My in-laws vacation in the home from time to time and have owned the condo for about 15 years. My wife and I are looking to purchase the condo and had a couple questions about the capital gains taxes that my father-in-law would occur.

First, is there any way for him to avoid incurring capital gains taxes from the sale of this property to a family member?

Second, we were looking to receive a "gift of equity" from him to fund a 20% down payment. We will increase the sale price of the condo by 20% and he will gift us that money for the down payment. Would he incur a greater tax burden because he is selling the condo at a 20% higher price? Even though he is not keeping any of that money and giving it to us during the sale of the condo?

Lastly, I know he can claim that he had lived there for 2 out of the last 5 years to avoid capital gains taxes. Since I have only lived here for the last two years, and his daughter was living here for the previous 3, can he claim that exemption? The bills for the condo (electricity, gas, water) have always been in his name the entire time if that means anything.

Thanks for any help!

[golfgod]

A few things to point out before I answer your specific questions.

1. The LT capital gains rate is currently 15%.
2. The tax is paid on the GAIN.
3. If he has been depreciating it he may have a hard time meeting the 2/5 rule.
4. If he increases the sales price by 20% his gain is going to be higher.
5. The higher price might mean it may not appraise for enough to cover your loan.
6. The gift tax can be complex.
7. Selling an investment property is complex.
8. 6 and 7 mean that a CPA should be consulted before signing any documents.

Now to the question that I didn't answer. The way to avoid capital gains has nothing to do with selling to a family member. It involves a 1031 (section of the tax code) tax free exchange. The problem with that is that the acquired property must be "like kind", in other words income property. Not necessarily a rental house, but income property.

[LoyolaCub68]

Originally Posted by golfgod

A few things to point out before I answer your specific questions.

1. The LT capital gains rate is currently 15%.
2. The tax is paid on the GAIN.
3. If he has been depreciating it he may have a hard time meeting the 2/5 rule.
4. If he increases the sales price by 20% his gain is going to be higher.
5. The higher price might mean it may not appraise for enough to cover your loan.
6. The gift tax can be complex.
7. Selling an investment property is complex.
8. 6 and 7 mean that a CPA should be consulted before signing any documents.

Now to the question that I didn't answer. The way to avoid capital gains has nothing to do with selling to a family member. It involves a 1031 (section of the tax code) tax free exchange. The problem with that is that the acquired property must be "like kind", in other words income property. Not necessarily a rental house, but income property.

I understand most of the points you put up there. As for the gift, aren't you allowed a gift of up to $1 million in your lifetime? My father-in-laws estate should be well under $1 million by the time he and his wife pass, which I think has something to do with giving away more than the $13,000 per individual per year. As of now, the total gift would be somewhere around 40,000. I thought I read somewhere that a husband and wife together can give a gift of $26,000 per individual per year tax free. If this is true, then we should be okay here.

I understand that the higher price may mean we don't meet the appraisal. That is what this whole thing is riding on. We would like a 20% gift to get an 80/20 loan. But we could always go FHA and get a 5% gift from him if the appraisal isn't up to it.

I don't know if he has been depreciating the condo to offset income from the rental. I can see your point, if he has been then it qualifies as rental income property so he would not have been living there as a primary residence because it was supposed to be rented out.

Thanks for the help!