Here’s the scenario:
Two years ago, my wife and I bought our first home. At the same time, my parents put up money to buy the vacant lot next door. Although they paid for the lot, we put title in my name. (We’re in different states, and we thought it would make everything somehow easier.)
Now, 28 months later, we’re about to close on the sale of the lot because my parents need money. The lot quadrupled in value and we are looking at a substantial capital gain.
My wife and I are only taking our expense money back out of the money after closing, such as association dues, property taxes, etc, all of which we have managed and paid for since we closed. The balance of the money after Realtor’s commission, excise tax, closing costs, etc., has to get back to my folks.
My question is: Are my wife and I responsible for the capital gains taxes because title was in our name? If we pay capital gains then hand the money over to my folks, will they then be taxed on it? Is there a legitimate way to avoid this double taxation? Also, my wife and I plan to sell our home in the next 8-12 months. Is there a way to use the sale of our home to avoid some taxation on the lot?
since it’s in your name, you’re on the hook for the taxes.
since they paid for the land, it sounds like they loaned you the money for the purchase. so, after fees, expenses, and taxes, you will repay the loan (not a taxable transaction for them, but any accrued interest will be income to them). whatever’s left over is yours.
After that, you and your wife can each give each of your parents up to $11,000. That’s $44,000 total gifts tax free. document it.
Thanks for the reply, that’s very helpful. Any ideas about whether the sale of our own home (next door to the lot) can save us some tax $ if it sells in some short-term specified time?
The tax free gift amount increased this year to $12K per individual.
Brandon,
Since the lot has not gone to settlement yet, why not quit claim your parents your interest in the lot first. Then, at settlement, your parents will be the sellers. They will get the proceeds from the sale and the income tax liability that goes along with it.
After the sale, your parents can reimburse you for your out of pocket costs
Brandon, Dave pointed out another good way to shift the income to your parents. I guess the point here is that there should not be “double” taxation; there are ways for you to avoid it. However, someone is going to be taxed on the gain, whether it’s you or your parents.
Thanks, guys. I knew someone would be taxed, and whether its us or them isn’t important to us. We’ll just pay the tax off the top, reflect it in the settlement statement and everyone SHOULD be happy. We were just concerned that we’d pay, then hand the money to them, then they’d have to pay.
I hate to beat this issue a bit more, but I still am not clear on the possible exemption that MAY be allowed if you sell land adjacent to your home within 12 months of selling the home. I’m not talking about taking a loss on the home. We’ve lived in our home for over two years and will take the tax exemption on the appreciation when we sell it. But I’ve heard mention by a Realtor and have read somewhere (but can’t remember where) that there is some verbiage out there regarding the scnario I’m describing. I’ll be sure to post when I track it down once and for all.
Income taxes are not paid at settlement, and will not appear on the settlement statement. Instead, income taxes are paid when you and/or your parents file their individual tax returns.
While it may not be important to you who actually pays, there may be a difference in the tax rate charged to you and to your parents. If you are in the 25% tax bracket or higher, then your long term capital gains tax rate is 15%. If your parents are in the 15% tax bracket or lower, then their long term capital gains tax rate is only 5% (at least on the portion of the capital gain that keeps their total income within the 15% tax bracket).
If one party is in the 15% tax bracket or lower, while the other party is in a tax bracket higher than 15%, THEN, wouldn’t it make more sense to have the titled seller of the property be the party that suffers the least tax consequence? If both of you are in the 15% bracket, then the party with the lower adjusted gross income should be the seller to minimize the tax bite.
The sale of adjoining land exception you refer to applies to land that was acquired with the primary residence, then later subdivided and sold separately within 24 months of the sale of the primary residence. For example, several years ago you purchased a home on ten acres of land. The entire ten acres and the house on that land was used as your primary residence. You subdivide and sell five acres of your land today and then, within 24 months, sell your house and the remaining five acres. The two sales can be combined and treated as a single transaction eligible for the capital gains exclusion on the sale of a primary residence
Your question asks whether the capital gains exclusion on the (near) future sale of your primary residence might in some way shelter the gains on the sale of the adjoining lot. In my opinion, the answer is no. The adjoining lot was never part of your primary residence. It was always held under separate title and is treated as investment property in the eyes of the IRS.
Thank you, Dave. We’ll do some research into our respective tax brackets… and before closing! Thanks also for your thorough explaination of the other matter, regarding splitting land.