My daughter and I are going to do a quit deed on her home. She is moving out of state, and I am going to pay off her $80,000 mortgage and then put about $15,000 into the house to get it ready to sell. I expect to clear about $10,000, which I will mail to her. I only am getting my expenses recouped. I will list the house within one month of paying off the mortgage. What would my liabilities be with the IRS if I am not profiting in any way?
Your daughter would be entitled to the exclusion of any gain from the sale of her principal residence (IRC Section 121), but not if it is sold/transferred to a related party. See IRS Publication 523, Selling Your Home, for ownership and use tests. There are also potential gift tax return issues regarding the proposed transfers.
I would keep the house in your daughter’s name, and loan your daughter the money for mortgage payments, upkeep, and improvements prior to sale. Then have your daughter pay you back at time of closing (and pay off the bank from the net proceeds).
If the title transfers to you, and then the house is sold, the amount you clear would be a reportable capital gain for federal and state income tax purposes. We recommend that you consult with a CPA to review your specific circumstances.
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Answered by: Paula A. Rummell, CPA, is tax senior manager with H2R CPA in Pittsburgh.