Home sale gain exclusion on partial purchase/partial gift property

[RTS1823]

Hi Everyone and thanks in advance for your thoughts,

I have a situation I've never encountered before.  So a father and daughter "bought" a property together for $150k, which the daughter has lived in for 4-5 years.  However, because the daughter had a recent foreclosure, the bank didn't want her on any of the paperwork, so the property was in dad's name only.  Daughter paid approx $40k down and made several improvements to the property while living there.  In March of 21, she legally bought the property from her dad for $90k with the remaining $60k considered an equity gift (the closing paperwork even indicates this) for a total of $150k.  This was essentially her buying out her dad's portion.

Unfortunately, she ended up selling the home and moving in Oct for $190,000, which on it's surface creates a taxable gain.  So my question is how do we establish the acquisition date considering the circumstances?  Does the gift, which normally brings it's holding period with it, create a 2+ year ownership period?  Do I treat these as two separate ownership interests?  Obviously trying to shelter her gain as much as possible.  A 1099-S was issued.

Any thoughts are appreciated and thanks again!

Mitch

[qbteachmt]

"for $90k with the remaining $60k considered an equity gift"

"Daughter paid approx $40k down and made several improvements"

"father and daughter "bought" a property together for $150k"

"This was essentially her buying out her dad's portion."

Have you done the math:

She already had $40k+ into it, so his basis share would be roughly $150k minus $40k = $110k. She paid him $90k for something he had $110k into, if you overlook her improvements. Why was there $60k more?

"she ended up selling the home and moving in Oct for $190,000, which on it's surface creates a taxable gain."

Who did she pay the $40k to? Was there always a buy-sell arrangement between them for the future? Who made the payments, insurance, taxes?

"Does the gift, which normally brings it's holding period with it, create a 2+ year ownership period?"

March 2021 sale to her, was deeded/titled?

[BobKamman]

Nice try, but you are confusing "holding period" under Section 1223 with "owned" under Section 121.  (From the language of your post, I don't think you are confused, but simply hoping IRS would be.)  

There are cases where mortgage interest and property taxes were allowed the equitable owner even when the legal title was held by a relative.  You could try to extend the theory of "constructive trust" to this situation.  First, though, have you calculated how much capital-gains tax would be owed?  If the daughter's income is low enough, the gain may be in the zero bracket anyway.  But then, of course, you might have to deal with state income tax.  

[RTS1823]

She gave the down payment money to her dad to purchase the home.  She paid the mortgage and all bills.  It was always their intention that once she could get a loan in her name, she would payoff his loan and get the house in her own name.  The $90K she actually paid was roughly the remaining principal balance of the loan in March.

[RTS1823]

It is possible I'm confused, I admit that this is not an area that I tread often.  Just trying to reach the best possible outcome without breaking tax law. 🙂

I wish her income was low enough that it wasn't an issue, unfortunately between federal and state the taxes are almost $11k.

I'll look for some of the cases you mentioned, see if I can educate myself some more as well.

[qbteachmt]

"She gave the down payment money to her dad to purchase the home."

5 years ago? March 2021? You have to determine when she is considered an owner, if you are trying to use the primary residence exclusion.

[RTS1823]

She gave her dad the down payment money 5 years ago when they initially bought the house.  But her name was only put on the deed in March 2021, which I think is going to end up being the sticking point.

[TaxGuyBill · Accepted solution]

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@RTS1823 wrote:

Daughter paid approx $40k down and made several improvements to the property while living there. 

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In opinion, paying $40,000 as a down payment when the house was originally purchased shows that she was an owner.  It seems like there was essentially a verbal "contract for deed" between her and her father.  I would have the memorialize that contract (showing she was purchasing it) and use that original date as her ownership starting date.

[qbteachmt]

I agree with Bob. And according to what you told us, her basis is $40k + $90k + $60k + $improvements, so that seems like she has a personal loss from the sale for $190k.

[TaxGuyBill]

The "gift" portion does not add Basis.

https://www.law.cornell.edu/cfr/text/26/1.1015-4

[qbteachmt]

"The "gift" portion does not add Basis."

Oh, good point. I kinda got lost over who paid what to whom and when.

[RTS1823]

Thank you!  A verbal contract for deed is an excellent way of putting it.  I'll have them put a contract together and that's what I'll use.  I appreciate your advice.