If my mom sold me her house for a $1 and then I sold her house for $700K would I avoid the capital gains tax?

Question

If my mom sold me her house for a $1 and then I sold her house for $700K would I avoid the capital gains tax?

Answer 1

You would have to wait a certain time period, but check your state's waiting period. In North Carolina it is 2 years, but it may be different elsewhere

Answer 2

No, you would have a capital gain of $699,999 - You would get a $250,000 capital gains exclusion if the house had been your primary residence for at least 2 or the last 5 years ($500,00 if married), so at best you would pay capital gains on $200,000.

Also, sine the $1 is beneath the fair market value, the IRS might consider it a gift and require your mother to report it as such, complicating her future tax returns (there are exclusions for gifts and she probably wouldn't have to pay any tax, but would be required to fill out extra paperwork).

A tax accountant would be your best bet to figure out how to avoid paying the max tax.

Answer 3

No.  The way I understand it, you have to stay in the house for a certain period of time (2 years I think, maybe longer) and make a profit of no more than $250 K single, $500 K married.

Answer 4

The best approach from your point of view is to consider the transfer from your mother to you as a gift.  In that case your basis is whatever your mother's basis was at the time of the transfer which I would think should be more than the $1. A second thing to consider is how long, if at all, you lived in the house.  Upon sale of the house you may have an exclusion of $250k to $500k if you lived in the house for two of the last five years.  So for example your mother's basis was $100k and you lived in the house for three years with your spouse.  That would give you a gross gain of $600k (not accounting for any cost of sale or other adjustments to the basis, such as improvements).  From that figure you could exclude $500k, leaving a Capital Gain of $100k.  

Now there could be other factors that might reduce that, but that would take some discussion to determine.  In addition, this approach could have tax consequences for your mother which would require an analysis of her circumstances before proceeding.  It is best to consult with a tax professional before taking any action as this matter can become complex.

Answer 5

NOPE,you would MAXIMIZE your capital gains with that scenario

Your mother, if she has been living in house can probably avoid capital gains taxes, but you won't  unless you live there. . .better read up on this, and then there's the gift tax issue. . . .

Answer 6

Her sale to you would most likely be considered a gift, which would require her to file a gift tax return and probably use up most of her lifetime exemption.

Then on your sale to her, if you had lived in it as your main home for two years, you could avoid tax on PART of the sale amount - but if she lived there that long, she could do the same thing if she just sold it herself.

You really don't have anything to gain by this scheme, and probably lots to lose.

Answer 7

No. Your cost basis is $1 and you sold it for $700,000. If you live in it for two years as your principal residence, the first $250,000 ($500,000 if married) is not subject to tax.