How To Decrease Taxes On Payout From Property Sale| Fix/Flipped Family Member's House

Question

Hello BP Community, I need some advice! My family has been working to renovate a family member's house after they moved into a retirement home. Happy to report she is loving it there and very happy, much better off! We came to the following agreement in terms of home sale and renovation:

Owner claims $10k over what fair market value was prior to renovation ($210k). Family members claim any excess (aiming for a list price of $250k).

Title Status: Sole ownership, transfer on death clause (to family doing renovations).

What is the most efficient way to set this up at the closing table so that funds can be allocated with the least tax burden on all? Family trust, Gift funds, expense owner for hours worked and materials purchased?

Thank you for your insight!

Josh St Laurent · Answer

@Chris Schwartz, good to hear your family member is loving the retirement home, that can be a challenging new chapter for many families.

A lot of potential directions you can go here, but my first question that could eliminate all other options is: Did she live there 2 of the last 5 years?  If so, she qualifies for a section 121 exclusion, which means she is selling her primary residence and won't owe capital gains tax on up to 250k in growth over her basis (It wouldn't be an issue if it sells for 250k).  So if she's lived there 2 of the last 5 years, and wants to sell the house after you are done renovating, taxes shouldn't be an issue.

Josh St Laurent · Answer

@Chris Schwartz I see, because in your example the profit would be 40k non taxable to the seller, the taxes shouldn't be an issue when distributing to family members. Your family member that owns the house could simply write a check, send EFT/wire etc. to the other family members once the property is sold. If they exceed 19k to one person they'll want to file a gift tax form with their CPA at the end of the year, if they're married that 19k doubles so it's unlikely you'll run into any tax complications doing what you're doing.

Hope that clarifies things but lmk if I can answer anything else!

Ashish Acharya · Answer

@Chris Schwartz The best way to minimize taxes depends on who receives the funds and how they are classified. Since the property is in sole ownership with a transfer-on-death (TOD) clause, the original owner’s taxable gain is based on the sale price minus their adjusted basis (purchase price + improvements).

Tax-Efficient Options:

• Reimburse Renovation Costs – Family members should be paid back at closing, which is not taxable income since it’s an expense reimbursement.
• Gift Funds – The owner can gift up to $19K per person (2025 limit) tax-free.
• Family Trust (For Long-Term Planning) – Could offer estate tax benefits but requires legal setup.
• Paying Family for Labor? – Converts proceeds into taxable income, making it less efficient.

If the owner lived in the home for 2 of the last 5 years, they may qualify for the $250K capital gains exclusion ($500K if married). A real estate CPA can help structure the closing efficiently to reduce tax burdens.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Chris Schwartz · Answer

Amazingly descriptive answer! Thank you!

Chris Schwartz · Answer

That clarifies! Thank you Josh!

Chris Schwartz · Answer

Thanks for the reply Josh! The question is more about how to get the money from the seller to the other family members who are not on title. I assume that money will be taxed somehow, whether it be a gift or claimed as income(?)

How To Decrease Taxes On Payout From Property Sale| Fix/Flipped Family Member's House

Most Popular Reply