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My mother has offered to sell her Massachusetts home (under a million) to me at 250k under market value or 50k less than she originally bought it (which is how low it got at one point). She has a low interest mortgage - can I take it over when I buy the house? Will the difference in value be considered a gift? Is that gift taxable or can it be added to a will where it is not taxed? Once I own it, how soon can I sell it without paying taxes? Appreciate any info - thanks!
My mother has offered to sell her Massachusetts home (under a million) to me at 250k under market value or 50k less than she originally bought it (which is how low it got at one point). She has a low interest mortgage - can I take it over when I buy the house? Will the difference in value be considered a gift? Is that gift taxable or can it be added to a will where it is not taxed? Once I own it, how soon can I sell it without paying taxes? Appreciate any info - thanks!
You have a golden opportunity here. Let her be the bank and YOU will pay her monthly payment that include the principals and interests. First, give her enough cash to pay off her mortgage, then agree on an interest rate, say 6% (hey, it's MOM!!), then calculate how much is the payment monthly for a 30 yr. fixed. That is, assuming she doesn't need the bulk of her money.
To answer your questions:
1) Unless her loan clearly say it's "assumable" otherwise, no, you can not take over the loan.
2) If she sells the house to you at below market value, the difference is *not* considered a gift. (if you're not sure, consult a CPA/ RE attorney).
3) Once you own it, you can sell it at anytime. If you sell it for more than the purchased value, then you will pay "capital gain" tax that's roughly 15-20% of the gain depending on your income bracket, plus your state income tax.
Perhaps she can put you on the deed if you pay her a certain amount? Then you give her money monthly for payments remaining. Your tax accountant or attorney will tell you if that’s legal and what the tax consequences will be.
2) If she sells the house to you at below market value, the difference is *not* considered a gift. (if you're not sure, consult a CPA/ RE attorney).
Why not? I remember hearing that a sale between related parties for less than market price will be looked at as a gift (the part that's not market price). Has something changed, or am I mis-remembering?
Thanks for the replies. I actually have enough cash to buy the house outright (because of a settlement and currently it seems this would be the best use of that cash and my savings) and would rather do that then get a high interest loan if I can't get hers. MA has a deduction (having a hard time finding out how much) of capital gains tax if you live 2 out of 5 years in the house before selling. I am wondering if there's any deduction for just 2 years of living in the house.
Why not? I remember hearing that a sale between related parties for less than market price will be looked at as a gift (the part that's not market price). Has something changed, or am I mis-remembering?
Here's a quote from basically every loan site...
Note that when you sell a home to a family member, the IRS will examine the sale price of a controlled transaction to investigate whether the sale is considered a gift or if it meets fair market value.
Quote:
Originally Posted by Jkgourmet
I think your nuts for doing this without a REAL ESTATE lawyer. And maybe a short consult with a c CPA.
If she sells her house to you for below market value, that would be considered a gift. After getting legal advice, you might consider just making it two separate transactions: pay full price for the house and then she could make a cash gift to you of $250,000. There are probably pros and cons to each approach but, with a full market purchase price, it might make it more clear that you wouldn't have capital gains tax to pay if you turned around and sold it. I've never done such a transaction so make sure that you get professional tax and legal advice to make sure that you follow the best procedure.
In any case, the good news to you is that gift taxes, if any are owed, are owed by the Donor--not the recipient (with the exception that if the Donor fails to pay the gift taxes then the IRS could come after you). While a $250,000 gift would exceed the yearly allowance, a form can be filed with the IRS to have that gift offset the lifetime exclusion--which is currently (2022) pegged at $12.06 million. You and your mother would have little worry about paying any gift tax, regardless of whether the gift is made now or through a will.
If you do choose to live in the house and it appreciates, you'll be eligible to receive a $250,000 exclusion from capital gains tax after living there for two years. The standard is for "2 of the last 5 years", so after just 2 years qualifies. You should be able to avoid capital gains tax, but there will be a transfer tax once you sell, which is usually of lesser concern. (The transfer tax is apparently $4.56 per thousand of market value in Massachusetts.)
In any case, the good news to you is that gift taxes, if any are owed, are owed by the Donor--not the recipient (with the exception that if the Donor fails to pay the gift taxes then the IRS could come after you).
There is no such thing as mandatory gift taxes and none are automatically owed on the making of a gift unless one exceeds the amount of estate tax exclusion (currently about $12 million).
In this instance, a sale of a house to a relative for less than market value results in a gift for the amount under market. This year, the annual gift exclusion is $16,000 for a gift to any individual, so the amount in excess of $16K is the gift. That gift should be reported on a form 709. The donor has the option of paying a tax on that gift or reducing the donor's estate tax exclusion by the amount of the gift. Given the level of estate tax exclusion, there is no reason that any tax need be paid here. There is no reporting of gifts up to the annual gift exclusion amount.
Calculation of the tax basis of the home will begin at the actual sale amount, not market value.
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