QUESTION:
This is the 2nd marriage for me and my wife and we both decided to sell our
individual homes and jointly purchase a new home. My home was sold first as
an initial payment on the newly constructed home and her home was being
rented in the mean time. We are now in the new home and she recently sold
the rental to her daughter and son-in-law, extending to them a Gift of
Equity of 40K in the Sales Contract of 140k. The question is, will my wife
and I be faced with any sort of gift tax as a result of the Gift Of Equity?
Will we have to pay income tax on the profit of her rental home? There is
still an outstanding mortgage balance on the new primary residence, of which
we have substantially reduced by applying the proceeds of the rental sale.
---------------------------------
david ingram replies:
An excellent choice to get rid of the old houses and start anew. And a nice
gesture to give the equity to her daughter and son-in-law.
Unfortunately, the gift of equity does fall into the gift tax scenario. She
should have written it up as a gift of $12,000 each this year and a loan of
$8,000 each until the next calendar year when she could have forgiven the
$8,000 loans.
Provided she lived in the house for 2 years out of the last five years,
there should not be any tax on the sale of the rental house for the brief
time it was rented.
If, on the other hand, the kids have been renting it for 4 or 5 years and
your wife was living with you in your house, then it was rented and there
may be tax on it. A lot would be determined by whether or not your wife
claimed it as a deduction on schedule A and did not consider it rented or
she filled in a Schedule E and made it a rental.
Find yourself a good accountant and figure out what happened.
Hope this helps.
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