Selling a home for less than it is worth, even to a family member, has implications for your taxes.
Q: My nephew bought my mother’s house four years ago for around $400,000. At the time, my mother was having financial issues and needed money. He is now willing to sell it back to her for the same price but the home is now actually worth over double that amount. During the last four years he was renting back the home to her. He won’t make a profit on the sale of the home to her and I was wondering if he will have any taxes to pay. If he has taxes to pay, my mom will reimburse him for those taxes and that will be hard for her.
A: Given that the home is worth around $800,000 or more, we’d hope your mom has the financial ability to pay for the insurance coverage on the home, the real estate taxes, repairs and maintenance expenses as well. The way you’ve described your mother’s situation, you don’t seem to comfortable in her financial abilities. Your mom may need to reassess to see if keeping the home will be the right thing for her.
But back to your question. You didn’t give us much information on why your mom had to sell her home to your nephew. If the transfer was to avoid paying a debt or to avoid having assets in her name, a creditor might still be able to go after the home and your mom. For purposes of your question, we’re simply going to assume that your family had the best intentions to help your mom out and not create a situation that could cause your mom and other family members greater harm through their actions.
Generally, if your nephew purchased the home for $400,000 and sold the home for $400,000, he would not have to pay any federal income taxes on that sale. He would not have any profit on the sale. But you indicated that he rented the home to your mom which indicates to us that the home was an investment property for him. As an investment property, he might have benefitted from depreciation he took on his federal income tax returns.
For example, if he took and benefited $10,000 in depreciation expenses for the home for the last four years, the IRS would want him to repay that depreciation on his tax return for 2017. So, if he had $40,000 in depreciation, he might have to repay the IRS $10,000 or 25 percent. Our numbers are just guesses and he would have to talk to the person that helps him with his tax returns to figure out where he stands on all this and how the tax laws affect him in his state.
On a separate issue, when you transfer title to a home, many jurisdictions can use that transfer to raise the assessment or valuation of the property for real estate tax purposes. While the sales price may be quite low relative to the actual value of the home, the local taxing jurisdiction may have the ability to ignore the actual sales price and use comparable homes in the area to determine the real estate taxes that will be due from your mother.
Lastly, if your nephew sells the home for $400,000 but it’s really worth $800,000 or more, he’s actually giving a gift of the difference to your mom. But if your mom and he had an agreement to allow her to buy the home back at the same price she sold it, it would seem to us that the right to repurchase would avoid the gift issue. When you have a sizeable gift, you are usually required to file a gift tax form with the IRS. Depending on what gifts you have made and your tax situation, you could potentially have to pay a gift tax to the IRS, it’s unlikely in this case and gift taxes would be a subject of a different column, but we wanted to point it out to you.
Overall, we doubt that there would be much impact on your nephew’s federal income tax situation if he sells the home back to your mom, but he should talk to a tax accountant or enrolled agent for more information.
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