[USER]

I don’t know where to ask this.
I purchased my mothers house a long time ago. It was a loan of about 160k.

The house is current valued for 650k. My mother is worried about the tax that would be paid on the profit and sale of the house as it would come out of the profit made.

Someone told her she can take a loan out on top of the house at the existing interest rate of 4% (existing mortgage interest rate).

Then the tax required to be paid would be on the profit minus the loan.

Does anyone know if this is true?

My personal situation is that I’ve been trying to save my money for retirement and for a future house.

I improved my credit so I can get a good interest rate on a new house with my partner.

My first reaction is no loans whatsoever on a house. Because I’ve literally stayed below the 2 credit applications for the credit rating lol.

I don’t think it’s a good look. And I don’t know how credible the tax situation is.

Keep in mind I became a high earner since this time so I presume the tax to be paid on the sale will be high.

Edit: she is mentioning a home equity line and not a loan.

That the capital gains would be minus the home equity line.

This is starting to drive me insane.

[Chris]

Think of it this way. Capital gains is the difference between buying price and selling price. Loans are restructuring the terms.

If you bought a $600k home for cash and sold it for $1M, you would have $400k in capital gains.

If you bought the home with a $600k mortgage, you would still have $400k in capital gains.

If you bought with a mortgage and added a 2nd $400k mortgage on top, your asset increased by $400k, so there are still $400k capital gains, regardless of what actually reaches your pocket.

(assuming no fees, other tax deductions, 1031 exchanges, etc).

Whoever told her that was probably thinking a 2nd mortgage -buys- the property, thus making the ‘new cost’ $1M.

Your home (asset) is just collateral for that transaction.

Now, there may be separate capital gains/tax situations involving step-up basis, 1031 exchanges, trusts, quit-claims, etc, but a simple refinance or HELOC or Home equity loan or recasting of the loan doesn’t change the buy and sell value of the asset.

[Jamie]

If you bought the house, it will be your gain upon sale and your tax to pay. However if you’ve lived in it for 2 of the last 5 years before sale, you get the $250k exemption.

The basis is not adjusted for any outstanding mortgage but can be adjusted for home improvements you make while you own it and closing costs when you sell it. Make sure you have documentation of all of that.

[Steve]

This is confusing… who owns the house? Is she selling or refinancing?

[Brandy]

who pays the mortgage? Sounds like you had an agreement to buy her a house (with your money or shared money and your credit) and she would live in it for a x number of years and then you would sell and split the profits in some way (or maybe for some reason you bought the house she already owned under somr similar agreemenrt).

Is that right?
If the profits are mostly hers or even if not, sell it now while you still have the 2/5 year tax exemption.

The agreement is up and the tax savings will expire soon, so time to sell, just kindly but firmly let her know you can’t hold it anymore. She can buy it back from you if she wants it.

If the profit is mostly hers, sell it to her for whatever you bought it for plus whatever your part of the profit was supposed to be.

Then she has the house, the profit via owned equity, and you are out. If she can’t buy from you, that’s on her. You want out.

Explain to her that agreement is up and you need to move on with your goals. And lucky her, she gets hundreds of thousands of dollars in profit (that YOU) made possible.

Explain to her what the tax loss will be if you don’t sell now and that, if you can, you’ll get her a place free and clear and everyone comes out a winner.

Also, she doesn’t just get to get a loan when you own the house.

Do ZERO more for her with your credit and income – she’s already proven she can’t honor agreements and your goals needs your income and credit.

How wise she is / likely to screw things up after she gets the house / all the money, would determine how much control I would let her have.

If she’s unwise, try to control the profits after the sale so that she is taken care of and her care / costs won’t fall back on your in some way way too soon.

[Shawn]

The basis is what you paid for it or market value at the time you purchased it. You can look at the basis on your tax return.

Since this is a rental, you are required to do depreciation.

Have you been doing that?

[Angela]

Is sounds like she is refinancing? If so, she will still have to pay the profit from the sale less the 250k deduction for a single person and 500k if married.

She also has to live in it 3 out of 5 years before she sells or depreciation has to be factored in which would be less of a deduction.

[David]

Loans, helocs, etc have zero impact on capital gains tax. Selling price minus your cost basis is what matters.

If you owe $2 dollars or $10 million against it the irs doesn’t care as far capital gains.

[Casie]

Wouldn’t she have already paid capital gains when she sold it to you?

[Daniel]

Did you buy the house for your mom or did you buy your house from your mom.

If you bought the house from her, it’s no longer her house.

If she doesn’t own it, she can’t claim the capital gains exclusion on primary residence from the sale of the property.

If you bought the house for your mom, again, the gains would not be hers, they would be yours.

If you are co-owners, you would need to apportion gains/losses based on your respective proportionate shares.

These scenarios should have been considered and discussed before you purchased the house from your mother.

Profits from the sale of an asset held for more than a year are subject to long-term capital gains tax.

The rates are 0%, 15% or 20%, depending on taxable income and filing status. Most filers are in the 15% (up to $518,900 a year)

[Sue]

Do you and your mother own the building? You and your mother are on the deed and only the $160k loan is in your name?

And, now your mother wants to initiate another loan in order to seep out the value of up to $650k that she’s due but also want your name on said potential Home Equity Line of Credit?

Just trying to clarifying at this point before responding more about your situation.

[Author]

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