Q: My mother and I own a house. She wants to sell. I plan not to take any of the proceeds. Do I have a tax liability?
A: First, understand what is taxed and what portion of a taxable gain may be exempt from taxation: You can sell your primary residence exempt of capital gains taxes on the first $250,000 if you are single, and $500,000 if married and the property is jointly owed. This exemption is only allowable once every two years. You can add your cost basis and costs of any improvements you made to the home to the $250,000 if single or $500,000 if married. Cost basis means the original purchase price of the home plus capital improvements (kitchen and bathroom renovations, room addition, deck addition, finished basement costs, etc.). The profit you make that exceeds your cost basis is what is subject to capital gains tax. You own half the house, so one-half of the sale proceeds and one-half of the cost basis is attributed to you for purposes of calculating any capital gains tax due. If the home is not your primary residence, then you do not qualify for the $250,000 exemption on your share of the sales proceeds, but your mother may still qualify for her share if it is her primary residence. If you make a gift of your share of the house or its proceeds after the sale to your mother, then you would report he gift on a federal gift tax return for the amount that exceeds the annual gift tax exclusion of $15,000 (for gifts in 2021). No gift tax is due by you or your mother if you elect not to pay any estimated tax, but your unified estate tax credit for your estate when you die will be reduced by that amount (currently, your estate would have to be worth more than $11.7 million dollars before the federal estate tax kicks in). If the capital gain on the sale of the house is less than $250,000, but half the capital gain is attributed to your half interest in the house and it is not your primary residence, then you would have to pay the capital gain tax on you share of proceeds. You cannot avoid this simply by giving your share of proceeds to your mother. But what if you and your mother were to deed the house to your mother's sole name before it was sold? In order to claim the $250,000 exemption on the sale of a primary residence, the owner must have resided there at least two years before the sale. Assuming she meets that requirement, the next question is whether she needs to have also owned your half of the house for those two years prior to the sale in order to apply the exemption to the proceeds for what had been your half of the house? The answer to this last question requires a tax professional to answer it, so your next call is to either a CPA or a tax attorney.
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