09 Aug Can I avoid capital gains tax when I sell this home?
Q. I bought my New Jersey home for cash in 2016. My father, who is a resident of Florida, loaned me 60% of the money so the deed is in his name. I pay all the expenses but never took deductions. I recently moved and my father wants me to sell the house and pay him back. Is there any way to avoid capital gains tax? Can the deed be changed?
A. It was nice of your father to help you out back in 2016, but the way you handled the purchase will lead to some unintended consequences when you sell.
Let’s cover what you should expect.
Back in 2016, you should have structured the purchase where the title would have been in your name and your father should have issued a mortgage and recorded a lien on the home for the amount he loaned to you, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.
Current tax law provides that a taxpayer can exclude a gain on the sale of the principal residence, up to $250,000 for a single taxpayer and up to $500,000 for a married filing joint taxpayer, if they meet certain qualifications, Papetti said.
There are two tests: the use test and the ownership test.
“A taxpayer is eligible for the gain exclusion if they have owned and used the home as their main home for a period aggregating at least two years out of the five years prior to its date of sale,” he said. “A taxpayer can meet the ownership and use tests during different two-year periods, however, they must meet both tests during the five-year period ending on the date of the sale.”
Based on the fact that you did not own the home, you do not qualify for the gain exclusion, Papetti said.
“I do not believe you can title the deed in your name now and qualify to meet the ownership test,” he said.
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This story was originally published on Aug. 9, 2021.
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