Q: Real Estate Tax Question
Mother in law wants to sell us a home, the cost of the home would be $50K, she has owned the home for 27 years and has used the home as a rental for about 20 years. She owes $21K on the mortgage, if we get a mortgage against the home for $50K, would she have to pay taxes on the $29K she will get after her mortgage is paid off? She bought the home for $102K and it’s now worth about $180K. She thinks the $29K she makes will all be paid to the government, I’m pretty sure she would not have to pay any taxes on that money.
A: You should consult a tax advisor and not a lawyer for this question, but the answer you will probably get is that: "If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home, provides rules and worksheets. Topic No. 409 covers general capital gain and loss information." IRS Topic 701. <https://www.irs.gov/taxtopics/tc701>
A:
Several different kinds of taxes come into play when someone sells real estate in Maryland.
First, transfer and recordation taxes are imposed based on the value of the "consideration" or money changing hands. (In cases without related parties this may be imposed on the value of the property). These taxes tend to fall in the 1.5-3% range in Maryland, depending on county and circumstances (first time homebuyer, etc.)
Secondly, capital gains taxes may apply if the property has appreciated in value since the original owner purchased it. Historically there has been an exclusion from gain if someone sells a principal residence they have lived in for at least 2 of the 5 years before selling. Unless property has been depreciated on tax returns (say if it were a rental), it would be unusual to owe capital gains tax if selling the property for less than its original purchase price.
Thirdly, federal estate & gift taxes may apply if the total value of all lifetime gifts combined with what is given away at death exceeds $5.4 million, or under new legislation if someone gives away more than $11.2 Million. (A lower amount may trigger state death taxes). Most people will not need to worry about estate and gift taxes.
As with any real estate transaction you may find it helpful to consult with an attorney to get specific legal advice on the particular facts of your situation. While I hope the general legal information in my answer helps, it shouldn't take the place of one-on-one consultation with a lawyer.
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