Sale of home BUT

[Catherine]

Sale of home.  NOT primary residence of the client.  Rather, she bought it because her daughter and son in law could not get a loan (they paid the carrying costs while they lived there, though).  The house has now been sold for a bit of gain.  Obviously this lady does not qualify for Section 121 exclusion -- but neither was this an investment property.  

Report on Schedule D with no exclusion --> or Form 4797?  Your thoughts, please.

[Lion EA]

Were the residents equitable owners?  Not renters?  (Not FMV renters.)

Second home.

[Catherine]

Residents were daughter and son in law of owner.  They paid all carrying costs directly; NO money sent to mom.  She had deed and mortgage in her name because they could not qualify for a loan at the time.

[JohnH]

How about this?  Report the sale on the 8949, then zero out the gain in the adjustments column with a code "N".  The kids can then use the same purch date and sale date as mom on their Schedule D + 8949,  reporting the gain as the selling price with zero basis.  This means no one gets the benefit of the principal residence exclusion, but at least the ones who benefitted the most pay the taxes.  It's a bit of a stretch, but might be OK.  If an audit ever occurred, everybody could settle up with one another if IRS takes a different position on who should report the gain.

I'd probably do it this way only if the kids do meet the "beneficial & equitable owner" test.

Edited June 18, 2015 by JohnH

[Catherine]

Mom was fully expecting to pay tax on the gain - and she is in a better position to pay it, as well.  (New grandbaby so daughter is home for a while, and mom has a good job).  

I was just over-thinking things and wanted to make sure I was reporting correctly.  I think so.

Thanks to all for your responses!

[joanmcq]

John, if mom nominees to kids because kids are equitable owners (who has been deducting the interest and taxes? Anyone?) then the kids would report gain, but exclude using sec. 121.  

[JohnH]

Joan: Yes, claiming the Sec 121 exclusion would be the ideal outcome.  I didn't go there because Catherine called it a small gain, coupled with the fact that the whole situation might be shaky anyhow.  I think even the "beneficial owner" matter might be in jeopardy if the kids didn't pay all or part of the down payment, even if they made all the loan payments & upkeep of the residence.  So depending upon how that played out, it might be worth foregoing the Sec 121 exclusion in order to hopefully avoid IRS deciding to take a closer look and potentially invalidating 3 years' worth of interest & property tax deductions on the kids' returns.  Of course, the decision depends on how much the "small" gain really is and thus how much tax is at stake in total.

Catherine clarified things when she said mom is OK paying the tax. In this case I think I'd just treat it as a second residence, report the gain on Schedule D/8949, and call it a day.  

[kcjenkins]

Schedule D, no exclusion.  

[Jack from Ohio]

Nowhere does it say that the daughter and son-in-law bought the house.  All those points are invalid.  She simply said sold for a small gain.  I agree with KC.

[JohnH]

Well, not the way I read it.  If "they paid the caryring costs" means they paid all the payments & incident of ownership, AND if they paid all or part of the down payment, then they are equitable owners.  They would be eligible to deduct the property taxes & interest, and MIGHTY be able to use the Sec 121 exclusion if there were a gain large enough for it to matter.  But the  adiditonal info Catherine provided pretty well put that line of reasoning to bed. 

[Richcpaman]

The kids could deduct the Mortgage interest and RE Taxes as "equitable Owners" per the Tax Court.   For using the Sec121 exclusion...  Has not been litigated or tested yet.  But If I was to extend the tax court case to sec 121, I believe that you would prevail in tax court.  Conservative would be to just report on Mom's return the gain and pay the tax.  More aggressive would be to exclude due to sec 121.

Rich