Dear Kiku,
From your question, you're saying that your son and his wife
want to buy the house you've been renting out all this time.
Is that correct?
OK.
You don't say how much your basis (tax cost) is in the house.
Nor do you say how much depreciation you've taken.
Since the purchase was part of an exchange, you wouldn't have
bothered unless the profit was at least $50,000, right?
So, Let me assume your tax basis in the house was about
$160,000 and the building value was about half - or $80,000.
You would have take about $58,000 in depreciation over the
last 20 years (3.636363% x $80,000)
In short, your tax situation is this:
Tax Basis: $160,000 - $58,000 = $102,000
(The balance of the loan doesn't really matter here)
Sales price - $500,000
Less tax basis 102,000
Profit = $398,000
Less all the selling and escrow costs.
Of that profit (federal rates only - add state tax rates, please)
$ 58,000 is ordinary income taxed at maximum 25% rate
$340,000 is capital gains income taxed at capital gains rate - probably 15%
So, for IRS purposes, your worst case tax is about $65,500
After you pay off the loan, taxes and escrow costs, you'll still
have over $300,000 left.
Now, what could you do with your children?
1) You could gift it to them and not have any tax at all - and no money.
But they take over the mortgage.
2)You could sell it them on an installment sale. That might reduce the
tax rates if you're in a low enough tax bracket. Remember, that 25% rate
on the depreciation is the highest rate. If you can get your personal
tax rate down to 15%, that depreciation rate will come down, too.
But, you will be spreading the payments over 10 or 20 years and
you wont' get your money now.
3) You could do what Daniel suggested and rent it to your children
with an option to buy. But they wouldn't get the tax or credit
benefits of owning, as you'd all like for them.
OR - here's an idea.
Sell them your present house. You've already lived there for two years.
You have $500,000 of gain, none of which is taxable.
You move into the rental for two years - then trade back.
Everyone wins and there's little or no tax at all.
In the final analysis, yes, go see a good tax pro to work out details.
But, at least you know your approximate tax bill now.
best wishes
Your TaxMama-ga
P.S. Remember, this is only an estimate based on the outline you provided.
Have someone look at the real numbers based on actual facts. |
