Capital Gains on Condo purchased with Cash

5 Replies

Hi all-

I purchased a condominium in Scottsdale, AZ almost 4 years ago for $65,000 with my mother's estate money. My brother has lived in it rent-free for that time. We put it in my name because he had a collection agency after him for a hospital bill. I am now selling the condo to him for $130,000 and am gifting him the equity for the down payment of $26,000 and giving him half of what is left over minus what I have to pay in capital gains. Will I have to pay capital gains on the gift equity? My broker says to seek the advice of a CPA but it's hard to find one knowledgable about real estate. I'm taking my money and investing in some rentals so I would like to find one. Thanks so much for taking the time to help a newbie:)

You'll get a ton of quality information on this website, but you will always want to hire a professional CPA to guide correctly inform you in topics such as this.  I'd start calling every CPA that comes up in your google search until you find one whom you think will satisfy your particular needs.

Originally posted by @Krista Walker :

Hi all-

I purchased a condominium in Scottsdale, AZ almost 4 years ago for $65,000 with my mother's estate money. My brother has lived in it rent-free for that time. We put it in my name because he had a collection agency after him for a hospital bill. I am now selling the condo to him for $130,000 and am gifting him the equity for the down payment of $26,000 and giving him half of what is left over minus what I have to pay in capital gains. Will I have to pay capital gains on the gift equity? My broker says to seek the advice of a CPA but it's hard to find one knowledgable about real estate. I'm taking my money and investing in some rentals so I would like to find one. Thanks so much for taking the time to help a newbie:)

You do not pay capital gains on the gift ($26,000), however, you may be subject to filing a gift tax return. You can gift your brother $14,000/year and not file a gift tax return. If you are married, then you can gift your brother $28,000 (by electing to split-gifts with your spouse). Note, although you may be subject to a gift tax return filing requirement, you likely will not pay any gift taxes, assuming you have not used your lifetime exemption.

Totally agree that you need to discuss this with your accountant and you absolutely need one.  So take this for what its worth.

I don't think the gifting, the source of the money, the fact your brother is the buyer, nor the fact you paid cash has any bearing on the taxes.  @Lance Lvovsky does the fact Krista is earning some money on this sale and then giving her brother a gift somehow avoid her paying tax on part of her earnings?  Certainly that would not be the case if the money came from a day job and then she gave her brother $26K of her after tax earnings.

It wasn't your residence, so I believe depreciation will come into play.  Because its a condo, the improvements are 100% of the purchase price.  You've held it for four years, so the depreciation is 4/27.5 * $65,000 = $9454.  So, your "basis" is $65,000 + purchase closing costs + any capital improvements - depreciation.  Your "gain" is the selling price less selling closing costs less basis.  You will pay tax on unrecaptured depreciation on the amount of depreciation.  You'll pay long term capital gains tax on the remaining gain.  So, a rough estimate, assuming no capital improvements and that you're in at least the 28% tax bracket would be:

basis = $65000 + $1300 (closing costs) - $9500 (depreciation, rounded) = $56,800

gain = $130,000 - $10,400 (closing costs) - $56800 (basis) = $62,800

tax on unrecaptured depreciation = 25% * $9500 = $2375

long term capital gains tax = 15% * ($62,800 - $9500) = $7995

total tax = $2375 + $7995 = $10,370

Now, if some of that money that was used to buy it was actually his money, then the situation is even more complex.  Since you bought it in your name, that would mean he gave you a give of $32,500 when the condo was purchased.  There are limits on gifts (cash or "in kind") that can be made without involving the IRS.

Another concern is "imputed income".  Even though you weren't charging rent, the IRS may view this as a rental property and the rent you didn't charge as imputed income.

You really need an accountant.  This is a very complex situation and I may be totally off base here.

@Jon Holdman There would be income taxes to the extent there is a gain on the sale. Also, there may be additional implications if this is not an arms length transaction (i.e. sale below fair market value). @Krista Walker should consult with her CPA.

@Krista Walker

I'm not sure the way you explained it that your brother  may have ownership in the property stemming from your mothers estate. You may be able to sell him your half on paper if possible. Work with an accountant and have your records for last 4 years including moms estate.  I would use someone CPA and or estate/tax attorney familiar with the laws in the state the property is located.

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