Will this deal be subject to a capital gains tax?

Question

My parents were kind enough to purchase a home for my husband and I for 109k. They are paying cash (still in escrow), and the plan is to repay them next month with our loan. The competition for these types of houses required a cash buyer and our loan would not cover the home without carpet. At this point, we will need to put at least $8,000 worth of repairs into it, and my parents are willing to tack that onto the principle. When they "sell" the house to us, it will then have a price tag of $117,000. Will they be taxed on the difference between what they bought it for ($109,000) and what they are selling it for (117,000) even though it was the cost of improvements that drove up the price and there was no profit?

Answer 1

You say improvements, then you say repairs.  Which is it?  Those are treated differently for tax purposes.  improvements add to their basis, repairs don't.

Answer 2

If you pay for the improvements, then yes, it becomes a capital gain.  It might be simpler for them to pay for the improvements, in which case the improvements get added to the cost basis and there is no capital gain.

Answer 3

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Answer 4

Two options:

I would separate the two transactions.  In one they are buying and selling a house.  In the other they are loaning you $8,000.  They could even gift you the $8,000.  

Of course, if they are paying for the repairs, then those repair costs get added to the cost basis of the house, so it may not be an issue - they will have put another $8,000 into the house, so $117,000 less $117,000 is zero.

Answer 5

This can be handled without any one paying capital gains tax.  However it is a bit complicated so you should go see a tax professional familiar with real estate transactions.