What are the tax consequences of buying my father’s home at a price that is equal to his remaining mortgage, not market value?

by Shane R. Fisher, CPA | Sep 26, 2018
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My father wants to sell me his house. He has a mortgage for about $242,000, but the house is worth about $415,000. He will sell it to me for the amount that he currently owes, so he will not have any gain. I will take out a mortgage for that amount, plus another $100,000 to remodel it. What would be the tax ramifications of this transaction?

There are several parts that need to be assessed before an accurate answer can be provided. 

First, if a primary residence, then there is only taxable income on any sale of a residence greater than $250,000 for a single and $500,000 for a married couple filing jointly. So, if you paid $300,000 for a house that is currently worth $415,000, and you sold it for $415,000, there would be no tax gain on the property. The likelihood that your father would have any taxable gain would not be an issue since the $242,000 would be less than the $250,000 or $500,000 gain thresholds on a primary residence. Now, with all that being said, you would still have the normal closing costs on the sale of the house in addition to the $242,000 for the home purchase.

Second, if this was not a primary residence but, say for instance, a summer home, any gain to the extent of the basis purchase price would be considered a long-term capital gain and taxed at between 0 percent and 20 percent, depending on income. If one’s income is over $38,600 but up to $425,000, the rate is 15 percent. Above $425,000, it is 20 percent. Below $38,600, it is 0 percent. Again, there would be closing costs and the $242,000 costs to purchase the property.

Third, you will want to understand the basis of the house you purchased. The basis will be your cost of the home plus your costs to remodel it, just in case you want to sell that property at some point down the line and the market has increased significantly to put you above the exclusion thresholds for a primary residence.

Discussing with a CPA whether the home in question is your primary residence and what is the basis of your home will help you gain a better understanding of the specific tax ramifications.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Shane R. Fisher, CPA, is a manager with Boyer & Ritter LLC in Camp Hill, Pa.  

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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