She is renting it but this is the only house she owns. The currently lease end March 31.
I have a client that owns a house in Texas that she is renting but has decided she wants to sell in a year or less. The house has a balance of about $52,000 and the house should sell for about $120,000.
Are there any tax implications of a Cash-Out refinance?
Does she have to wait any lengthy of time after the cash-out refinance before she can sell the house?
I guess the question is whether she can reduce the capital gains tax by pulling as much cash as she can by refinancing before she sells.
If she does the cash out refinance and takes the balance back up to about $96,000
and sells for $120,000 she will owe tax on about $24,000
If she just sells she will owe tax on $68,000
Is that correct?
Whether she does the cash out refinance or not, can she defer the taxes owed on the profits from the sell of the house.
Now to complicate things, she wants to give as much of the profit as she can to her daughter without causing a tax burden for her daughter ( daughter is 21).
HELP
I will check the boards but I would appreciate it very much if any guidance and advice could be sent to my email address
Now to complicate things, she wants to give as much of the profit as she can to her daughter without causing a tax burden for her daughter ( daughter is 21).
Paul,
A gift is taxable to the giver not the recipient. In the unlikely event that there is a Gift Tax to be paid, it will be paid by the mother on the mother’s tax return. Mother should sell without refinancing, pay the capital gains taxes, then distribute gifts to the daughter from after tax proceeds.
If the mother gives the daughter no more than $12K per year, the gift is tax free. Any annual gift amount to the daughter that exceeds $12K is taxable and reported to the IRS on a Gift Tax Return. When the total amount of taxable gifts during the mother’s lifetime exceeds $1 million, then the IRS assesses a gift tax. Taxable Gifts up to $1MM reduce the federal estate tax unified credit, which could eventually result in federal estate taxes if the mother’s estate is large.
You don’t tell us the nature of the relationship with your client. If you are acting in a financial planner, CPA, or tax advisor capacity, then you should also advise your client that the best potential tax outcome is to not sell the property at all.
In the absence of any compelling reason to sell (such as declining property value), the mother should eliminate capital gains taxes entirely by letting the daughter inherit the property. At inheritance, the property’s basis is stepped up to its appraised value. Then, when the daughter sells the inherited property at appraised value, there is no capital gain and therefore no capital gains taxes either.