Capital Gains vs 2 year stipulation.

[Mojorator]

What is the name of your state? CA

Please Help...

Here is my situation.

January 2003 - I bought a house but my Sister signed for the loan due to my Credit Score not up to par.
January 2003 - Sister Signed a quit claim form to add me to the deed, BUT was never filed with the state. I still have the notarized form.
January 2003 - Sister never moved in due to the commute to work which is about 90 miles 1 way.
January 2003 - I moved in and have been living in this house and making all the mortgage payments and commuting the 90 mile trek.

April 2004 - Sister filed her taxes and included the house/mortgage as part of her taxes.

Present - I plan on relocating (To Texas) therefore I will need to sell the house.


Questions:

#1 - If the house is sold BEFORE the 2 years (January 2005), is my sister Liable for the capital gains tax?
#2 - If the house sells and makes a profit of LESS THAN $250K, is my sister liable for the capital gains tax?
#3 - If the house is sold, can she give ME the Profit so I can use it to purchase a new house?
#3A - With the senario above, will I then be liable for the TAXES of the profit gained?
#4 - Should we wait till January 2005 to sell the house or will this even make a difference since my sister never lived in it?
#5 - Is there anything me and my sister need to do to save on capital gains tax in case we have to pay it?


Thank in advance-

Mojo

 

[gobonas99]

What is the name of your state? CA

Please Help...

Here is my situation.

January 2002 - I bought a house but my Sister signed for the loan due to my Credit Score not up to par.
January 2002 - Sister Signed a quit claim form to add me to the deed, BUT was never filed with the state. I still have the notarized form.
January 2002 - Sister never moved in due to the commute to work which is about 90 miles 1 way.
January 2002 - I moved in and have been living in this house and making all the mortgage payments and commuting the 90 mile trek.

April 2003 - Sister filed her taxes and included the house/mortgage as part of her taxes.

Present - I plan on relocating (To Texas) therefore I will need to sell the house.


Questions:

#1 - If the house is sold BEFORE the 2 years (January 2005), is my sister Liable for the capital gains tax?
#2 - If the house sells and makes a profit of LESS THAN $250K, is my sister liable for the capital gains tax?
#3 - If the house is sold, can she give ME the Profit so I can use it to purchase a new house?
#3A - With the senario above, will I then be liable for the TAXES of the profit gained?
#4 - Should we wait till January 2005 to sell the house or will this even make a difference since my sister never lived in it?
#5 - Is there anything me and my sister need to do to save on capital gains tax in case we have to pay it?


Thank in advance-

Mojo

Ummm....if the house was purchased in January of 2002, then the house would have been owned for 2 years in January of 2004 - aka January 2005 will be THREE years.

 

[Mojorator]

Ummm....if the house was purchased in January of 2002, then the house would have been owned for 2 years in January of 2004 - aka January 2005 will be THREE years.

My Mistake ... 2003

Sorry about that.

Mojo

 

[abezon]

1. You have a notarized quit claim deed, so you are an owner of the house as of 1/2003. However, you need to record the deed so that your claim to the house is protected against other claimants. Just go down to the county recorder's office & pay the recording fee.

Since the house is legally yours, & you paid all the mortgage & were the only occupant & were obligated under your agreement with Sis to pay the mortgage (I assume), you can deduct the mortgage interest & property taxes in 2003 & 2004. The Tax Court dealt with this situation in Tax Court Memorandum Opinion No. 1997-551. If your sister claims a mortgage interest deduction, she must also declare the mortgage interest payments you make on her loan as income. (Whether to open this can of worms by amending both returns is for you & her to decide. Legally you should amend both returns.)

2. I'm unclear whether the deed you have puts the house in both names or just yours. The answer will affect the excludability of any capital gains. If the deed lists you as sole owner, you will qualify for a reduced exclusion due to change in employment now, & for the full $250,000 exclusion 2 years after the deed was notarized, assuming you live there for the 2 years. If the deed is in both names when you sell the house, you can exclude your 1/2 of the gains under the same rules, but Sis has to pay long term capital gains taxes on her share of the profits whether she gives the money to you or not.

3. Things to do: First, record the deed from 1/2003. Second, if the house is in both names, have Sis quit claim the rest of the house to you ASAP. You'll still qualify for a reduced exclusion & all the profits will be in your name, so Sis pays no taxes. Sis may need to file a gift tax return, but won't pay any gift taxes.

 

[Mojorator]

1. You have a notarized quit claim deed, so you are an owner of the house as of 1/2003. However, you need to record the deed so that your claim to the house is protected against other claimants. Just go down to the county recorder's office & pay the recording fee.

Since the house is legally yours, & you paid all the mortgage & were the only occupant & were obligated under your agreement with Sis to pay the mortgage (I assume), you can deduct the mortgage interest & property taxes in 2003 & 2004. The Tax Court dealt with this situation in Tax Court Memorandum Opinion No. 1997-551. If your sister claims a mortgage interest deduction, she must also declare the mortgage interest payments you make on her loan as income. (Whether to open this can of worms by amending both returns is for you & her to decide. Legally you should amend both returns.)

2. I'm unclear whether the deed you have puts the house in both names or just yours. The answer will affect the excludability of any capital gains. If the deed lists you as sole owner, you will qualify for a reduced exclusion due to change in employment now, & for the full $250,000 exclusion 2 years after the deed was notarized, assuming you live there for the 2 years. If the deed is in both names when you sell the house, you can exclude your 1/2 of the gains under the same rules, but Sis has to pay long term capital gains taxes on her share of the profits whether she gives the money to you or not.

3. Things to do: First, record the deed from 1/2003. Second, if the house is in both names, have Sis quit claim the rest of the house to you ASAP. You'll still qualify for a reduced exclusion & all the profits will be in your name, so Sis pays no taxes. Sis may need to file a gift tax return, but won't pay any gift taxes.

Many thanks to you sir for the detailed explanation.

I will take your advice and proceed.

Mojo