Buying A Home For A Dollar
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader bought
her mother's home for one dollar. Now she is wondering what her tax burden will
be if she sells the home. Ilyce and Sam explain how taxes are calculated on
homes that are purchased versus gifted.
Q: My mother-in-law, who is disabled due to a stroke, used a quit claim deed
to sign over her house to my wife for $1 a couple of months ago before my mother-in-law
went into the nursing home. My mother-in-law owes the bank $95,000 on the mortgage
to the home.
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Because my wife had been her mother’s primary caregiver for more than
two year, she is entitled to keep the house and not have to give proceeds to
the state for her care.
My question is this: If we sell the house will we owe capital gains tax on
the difference between the amount we owe on the mortgage and the sales price
or the difference between the "purchase" price of $1 and the sales
My wife has been making the mortgage payments since she took ownership of the
property. We expect the property to sell for about $200,000.
A: If your wife truly bought the home for $1 plus the assumption of the debt
on the home, you will have to pay taxes on the entire sales price of the home.
Those taxes will not be capital gains but ordinary income if you sell the home
before you have owned it for at least one year. If you have owned the house
for more than one year, then the profits would be considered capital gains.
If you are taxed on the profits as ordinary income, you can expect to pay up
to 35 percent of the profits in federal income tax, depending on your other
income and other deductions on your tax return. You would also pay state income
If the profits are taxed as capital gains, you’ll pay up to 15 percent
of the profits in taxes, plus state tax. Unfortunately, in either case, that
much gain may have other unintended consequences with your tax return to the
Federal and State governments. Some of these consequences may cause you to pay
more taxes due to your inability to get certain tax credits and deductions or
may cause your state income taxes to be higher. Your tax professional may be
able to help you.
You may want to talk to a tax planner to determine how to handle your mother-in-law’s
estate. You say that your mother-in-law “sold” the home to your
wife for $1. Was that a true sale or was she gifting the house to your wife.
Those two different scenarios will have different impact on your income taxes
when you sell the house.
If you and your wife plan to move into the house and live there for at least
two years, the two of you could keep up to $500,000 in profits tax free. You
may find that this is the best way to go.
NOTE: This column is distributed by Real Estate Matters Syndicate,
PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted,
resyndicated or redistributed without written permission from the publisher.