Q: In 2007, my dad sold a vacation home to my brothers for a $50,000 gain. He agreed to finance the property for them. No formal mortgage was ever drawn up and after 4 or 5 months he told them to stop paying him the monthly payments because he did not want to have to claim the income on his taxes.
Shouldn’t he have claimed the capital gain on his taxes at the time of sale? He never reported anything and they never claimed a gift. I want him to talk to someone about the situation so there aren’t any tax ramifications down the line. My father has dementia now and barely understands what is going on. The title to the property is in my brothers’ names.
A: It sounds as though your father wound up giving your brothers the vacation home as a gift rather than as a sale.
When your father sold the property, he would have reported the sale on his income tax return. As the home was a vacation home, your father would have had to have paid tax on any profit he made on the sale of the home. That profit could have been capital gains or ordinary income depending on how long he owned the property.
If he owned it less than a year and sold it for a profit, he would pay federal income taxes just as he would on all his other income. However, if he owned if for more than one year, he might only have to pay taxes at the capital gains rate of ten percent or more, depending on his income.
When he told your brothers to pay him what they owed, your father would have had to declare the interest they paid on a monthly basis as income. Once he forgave the debt, your brother’s would or could be construed to have received income as a result of the forgiveness of the debt or your father could have been deemed to have given your brothers a gift of the amount they owed.
There are quite of number of issues raised in your letter relating to your father’s and brothers’ tax situation that might be wise to be discussed with an accountant.
I am sorry to hear that your father has dementia. That’s an awful way to go. Since he barely understands what’s going on, you should make sure that someone has a financial power of attorney and a power of attorney for health care. I don’t know if your father has a will or trusts set up, or even if he has consulted with an estate attorney. But you should make sure this gets done in the next few weeks so that you and your family will be able to take care of your father properly.
For more details about the sale of the property, please consult with your dad’s tax preparer.