Q: My mother paid about $80,000 for her house and it is now worth about $115,000.

Unfortunately, she can no longer afford the mortgage or the maintenance. She owes about $86,000, which includes payments she has missed and foreclosure fees.

She wants to quit claim her house to me to save it from being foreclosed on. I would like to then sell the house immediately. However, she lives in Ohio and I live in California, so I could not keep it as my primary residence.

Would I have to pay capital gains tax on the difference between what she paid for the house and what I sell it for? That would come to about $20,000. If this is true, how would I calculate the tax?

I’m trying to make a profit for both of us. Even though she will quit claim the house to me, her lender still wants the $8,000 that is in arrears and I would want to be reimbursed for the cash I’ll be out if I pay what is owed and bring the loan current.

She can’t stay there because the mortgage payments are too high and no lender will refinance it in my name without 6 months to 1 year of regular monthly payments.

A: Here’s one solution to the problem: If you have the financial ability to buy the home, why don’t you just buy the house from your mother for the amount that she owes on the mortgage ($86,000)? At that price, you should not have a problem having the home appraise out. If you feel that the home will appraise out at the higher value, you can buy the home from your mom at the higher price. Then, you should be able to get the appropriate financing for the property at a more favorable rate (unless your credit is also bad).

You might be able to qualify to buy the home as a second home at a low interest rate or even as an investor, which means your interest rate would be slightly higher than what an owner who plans to occupy the property as a primary resident would get, it should still be less than what your mother is paying now.

Your mother can rent it back from you (at a price that she can afford) until you have owned the property for a year and can sell it. Or, your mother can move out and you can rent it to someone else who might be able to pay more (if the local rental market will support a slightly higher payment).

When you sell the property, you would owe capital gains tax, which is why you should wait a year to sell. If you sell immediately, then you would have to pay tax at whatever your federal marginal tax rate is, up to 35 percent, plus state tax.

If you wait at least 12 months to sell, the tax falls to about 15 percent because the house would be considered a long-term capital gain.

Another option would be to list the home for sale now and have your mother sell it. If you are able to get a contract to sell the home quickly, the lender may slow the foreclosure proceedings to give you time to sell the home and pay them off.

You should speak to a real estate attorney in your mother’s area who knows how to negotiate with the lender to buy you enough time to complete the transaction.

May 27, 2005.