Capital gains tax on the sale of a home, what can be done to avoid them?
My parents bought this (in NY state) home in 00 for 48k. They lived here year round until march of 06 until they become residents of MO. Theyre selling it to us for 95k (still below value). Is there any way to avoid paying large capital gains taxes on their part?
If it makes a difference theyre gifting us 25k of the sale price (our loan will NOT allow for it in a sellers concession, so it is a gift)
Any accountants advice would be awesome :)
Audrey A2008-02-08T16:04:01Z
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Did they live in the house as a primary residence for 2 of the past 5 years? If they did, then will not have to pay any capital gains tax. There is an profit exclusion amount of $250,000 ($500,000 if married) if they can say yes to the above question.
From the information you provided it sounds like they won't have to worry about it.
As long as they complete the sale to you by March of 2009 they still meet the "2 of 5" rule and can exclude all of the gain ASSUMING that they did not rent out the property since leaving it in 2006.
The basic rule on excluding the gain on sale of a principal residence from capital gains tax is that you must have owned and lived in the home as your principal residence for 2 of the 5 years immediately prior to the sale.
So, if they sell it to you today, look back 5 years to 2/8/2003. Did they live in the home for at least 2 years since that date? If they moved in March of 2006 they lived in the home for 3 years and would qualify for the exclusion.
However if they rented the property out since moving out, even to you, they must recapture any depreciation allowed or allowable while it was held as a rental property. That is taxed as a long term capital gain regardless of the exclusion AND is taxed at a higher rate, up to 28%, depending upon their numbers.
Historical note: The exclusion of the gain on the sale of a personal residence was enacted a bit over 10 years ago, under the CLINTON administration. Neither Bush had ANYTHING to do with it!
On your principle home, you can make a profit of up to $500,000 with no tax due. This was changed in Bush's first tax law. It requires that you've lived in the home (one or two?) years. You can repeat the excemption on future homes as well.