Q: My mother-in-law, who is disabled due to a stroke, used a quit claim deed to sign over her house to my wife for $1 a couple of months ago before my mother-in-law went into the nursing home. My mother-in-law owes the bank $95,000 on the mortgage to the home.
Because my wife had been her mother’s primary caregiver for more than two years, she is entitled to keep the house and not have to give proceeds to the state for her care.
My question is this: If we sell the house will we owe capital gains tax on the difference between the amount we owe on the mortgage and the sales price or the difference between the “purchase” price of $1 and the sales price?
My wife has been making the mortgage payments since she took ownership of the property. We expect the property to sell for about $200,000.
A: If your wife truly bought the home for $1 plus the assumption of the debt on the home, you will have to pay taxes on the entire sales price of the home. Those taxes will not be capital gains but ordinary income if you sell the home before you have owned it for at least one year. If you have owned the house for more than one year, then the profits would be considered capital gains.
If you are taxed on the profits as ordinary income, you can expect to pay up to 35 percent of the profits in federal income tax, depending on your other income and other deductions on your tax return. You would also pay state income tax.
If the profits are taxed as capital gains, you’ll pay up to 15 percent of the profits in taxes, plus state tax. Unfortunately, in either case, that much gain may have other unintended consequences with your tax return to the Federal and State governments. Some of these consequences may cause you to pay more taxes due to your inability to get certain tax credits and deductions or may cause your state income taxes to be higher. Your tax professional may be able to help you.
You may want to talk to a tax planner to determine how to handle your mother-in-law’s estate. You say that your mother-in-law “sold” the home to your wife for $1. Was that a true sale or was she gifting the house to your wife. Those two different scenarios will have different impact on your income taxes when you sell the house.
If you and your wife plan to move into the house and live there for at least two years, the two of you could keep up to $500,000 in profits tax free. You may find that this is the best way to go.