I bought my mother’s house for $10.00 do I have to pay taxes?

Question

I bought my mother’s house for $10.00 and sold it for $140,000. I want to use 70,000 for the down payment to my new house and I want to loan the other 70,000 to my brother. Since I only lived in that house for one year can I do what I just said without paying taxes?

Answer 1

I think there is some sort of penalty involved with selling it so soon to buying it.

Answer 2

Nothing really to avoid taxes.  Spending part of the money toward another house, and lending the rest to your brother, doesn't save you from owing tax on the gain.  Since you didn't own it and live in it for two years, you aren't eligible for the exclusion.  So you might have to cut back on that loan to your brother, since you'll probably owe around $21,000 in tax on the sale of the house.

Answer 3

I would consult a tax adviser for this situation. You could really get slammed..................or not.

Answer 4

"I bought my mother’s house for $10.00 and sold it for $140,000."  You probably owe taxes based on that statement alone and it does not really matter what you want to do with the proceeds of the sale.

Look at www.irs. gov and find Publication 523 Selling Your Home and see where your situation fits into the IRS regulations.  If you did not live in it for two of the past five years, you probably owe taxes on the capital gain.

Answer 5

Your capital gain is NOT $139,990.

Your capital gain is based on your cost basis which is based on your mother's cost basis as well.  See IRS publication 551.  Even though she sold you the house for $10, you made a gift of the rest of the house.  When a house is partly sold, partly gifted, you have to look at the numbers. (Apparently nobody actually reads the IRS publications before answering on these boards!)

For example, if your mom's basis was $50,000, then your basis is $50,000 and you would owe capital gains on only $90,000.  You also get your mom's holding period, so the tax rate is 15%.

When you look at pub 551, do not add anything for "gift taxes paid"--if the gift of equity was within your mom's first $1 Million of lifetime gifts, she didn't pay any.  Since the "gift of equity" is $139,990, your mom was required to file form 709.

Additional information.  To qualify for the $250K exclusion you must both live in the house AND own it for 2 of the last 5 years.  You meet the use text, but not the ownership test.  (There is a concept called "equitable ownership" but you must do more than just live there and pay the bills.  The IRS would argue that your mom still owned the house and you were just helping her out.)

Answer 6

When your mother gave you the home for $10, the difference between that and fair market value at the time is a gift and she (should have) filed a gift tax form (although no tax was due unless she has gifted more than $1 million in her lifetime).

Your cost basis for the gift would have been her cost basis (her original cost and improvements) plus the $10 you paid her.  But if she did not file the gift tax form, your capital gain might be considered $139,990.  Whether you pay long or short term capital gains on that depends whether you owned it for more than a year.

The state where the property is located will also likely want state tax.  So you need to work that all out and see what you need to file in estimated taxes before distributing the other $70,000.

Note that if you had lived in the property for at least 2 of the past 5 years, you would have had $250,000 capital gains exclusion (or $500,000 for a couple), and none of this would matter.  You might get a partial exclusion if you meet one of the tests in Publication 523.

Answer 7

Ouch.  You now have to pay capital gains on a $139,990 gain!  You didn't own the house for over two years so you can't take the exemption from the tax.  Hopefully you owned it at least a year and a day - that way the capital gains are long term and taxed lower than if you owned it a year or less!