selling half of primary residence to roomate???

General Real Estate Investing
1

Hello,

I am looking to sell my share of my primary residence to my roomate, who is getting married. In him wanting to buy my half of the house, I am looking to set up the transaction that will minimize tax implications. Below is some info about my situation…

  1. He is not refinancing. I would like my name to be off the mortgage. Our lender has said he can remove my name without having to refi.

  2. The house is in IL. I am not sure if there are any special taxes that go along with this for my state.

  3. Can I use a quit claim deed to get around taxes if I accept a gift payment from him for my half? There is ~60k equity in the house, so I would have to file the 706 or 709 form for my 1M lifetime gift exception, correct? Would there be any other gains taxes on this?

  4. If a quit claim deed is not good for this situation, is there a good alternative? His attorney said he was going to set it up like a normal sale, but I have a bad feeling we will be paying a lot of taxes we probably don’t have to. Ideally, I would just like to get a check from him, get my name off the mortgage, and transfer the deed to him (all with minimizing taxes and fees)

Thanks so much for your help!!
Greg

2

There is no escaping the tax man. Charachterizing the transaction as a gift so as to avoid taxes will likely get you in trouble with the IRS. However, section 121 of the tax code does offer a possible solution. Read up on it but in general you can avoid tax on up to $250,000 in gain on sale of your primary residence if certain criteria are met.

3

  1. If the lender will allow your name to be taken off the mortgage note without requiring your roommate to refinance, then is he being asked to assume the loan? Sounds like a stupid question, but I can’t figure out how the lender is going to release you from liability if your roommate defaults unless he formally assumes the entire note.

  2. If your state has a transfer tax or an excise tax on the sale, you may be asked to pay some or all of it. A local title company or settlement attorney should be able to answer this question for you.

  3. Yes, you can use a quit claim deed. However, if you purchased title insurance when you bought the property, there is no reason not to use a warranty deed to transfer your share of the title to your roommate.

Any payment you accept for your half will not be a gift. It will be consideration received for consideration given (your half of the property) just as would occur in an arms length sale to a neutral third party. Your profit on the sale, if any, will be a capital gain. You may not have any tax if you qualify for the Section 121 capital gains exclusion

4)What you are doing is a typical sale. The fact that your roommate is the buyer and that you are only selling him your half interest in the property does not affect the tax treatment on your sale proceeds. If your roommate is assuming the loan, and you are getting a release of liability, then you will want all the documentation from a “normal sale” for your records.

4

i’m lost - you’re both on the deed? you both own it as tenants in common? and you want to sell your half to him…and not pay any taxes.

why don’t you transfer the deed to him, he refi’s and pays you your half - tax free money for you.

obviously a lot of trust has to go into this and yes your lender would have to agree to it. who’s your lender? family?

5

TMCG,

How is this not the same as a sale? I give you something with the expectation of receiving some compensation, and, you give me an amount of money that we mutually agreed represents the value of the thing I gave you – that is a sale, right?

Please explain how you plan to convince the IRS that the money received is tax free to the “seller”.