Expert: Dick Dennis - 9/18/2007

Question
QUESTION: My parents originally owned our home in CA until last year when we refinanced the home and added our name to the title. We did not purchase the home we only refinanced. I guess its registered as a gift. Our home now has both my parents and us as joint tenants on the title, we own the home 50/50. We want to sell our home and purchase a new home, but are worried about capital gains. Could we save my parents from capital gains if we put them on the title of our new home? What is the penalty for capital gains? How much in capital gains could this cost them? Since, we would have to pay it.

ANSWER: You obviously did not have a tax expert looking over your shoulder, Brandie, when you were added to the title of what was once owned solely by your parents. By doing that, your tax basis becomes the same as theirs when they bought the property . . . low. So that when you sell the property your tax liability becomes more when you sell.

However, all that gets wiped out as long as you have lived in your home for 24 of the past 60 months and file your taxes jointly, up to $500,000 for both of you. The same could be true for your parents if THEY WERE LIVING IN THE HOUSE, too. Otherwise, it becomes an investment property and when the property is sold they may be liable for a capital tax gain. It makes no difference if you put them on title with you on your next house. They will then be liable all over again when you sell THAT house.

Now you see the value of consulting with a CPA or other tax expert to make sure you are doing this correctly. If you fail to do this because of professional fees, you will probably compound any errors.

I do wish you well.

Dick Dennis          dixiedee13@verizon.net

---------- FOLLOW-UP ----------

QUESTION: So, since my parents had it listed as rental property when we lived there, can we include that in our 24 of the past 60 months. Or is it 24 months from the time we were placed on title? My parents purchased the home in 1970 for $75,000. We have only been on title for one year but lived in the home for 10 years. So do we both get hit with capital gains if we sell our house for $650,000?? What is the penalty?? Is is 5%, 10% or 15%??

Answer
If you have been on title only 1 year, then you are not qualified to take advantage of IRC 121 that allows you to take up to a $500,000 gain forgiveness. The rule actually says you must have lived in the residence as your prime home for 24 months prior to the actual closing of the sale.

That goes for your parents, too. If they did not live in the property as their prime residence for 24 of the previous 60 months, then it would be an investment for them and they must treat it as such. Like I suggested, sit down and talk with a tax expert to have it fully explained to you. I wish you well.

Dick Dennis