The second issue one needs to consider is the possibility of capital gains tax being realized upon the gift of encumbered property. As we know, a transfer of property subject to a mortgage can be treated by the Internal Revenue Service (IRS) as a sale. The U.S. Tax Court held that, “[t]o the extent the debt assumed by the transferee exceeds the transferor’s adjusted basis in the property, a disposition is deemed to occur, and a corresponding gain must be recognized by the transferor.”6 There are further complications in this capital gains area. A lifetime gift of an interest in real property causes the donee of the gift to take the basis of the donor in most cases.7 If the transfer takes place at the death of the owner, the person inheriting has a basis in the amount equal to the value on the date of death.8 As a result, property inherited in years after 1977 will receive an automatic step-up in basis. A lifetime gift can, therefore, result in more capital gains tax than an inheritance. The practitioner should also avoid a possible loss of the $250,000 capital gains exemption.9 If one owner originally owned the property but then adds another to the title, each of the owners would have to qualify for the $250,000 capital gains exemption as to his or her share of the sale proceeds. As Congress looks for ways to balance the federal budget, there is a strong possibility that capital gains could be taxed at the same levels as ordinary income in the future, resulting in tax rates up to 38 percent or more. For highly appreciated property, or property that will appreciate in the future, a gift may have significant income tax consequences at the time of sale for the person receiving the gift. It is important to note that all attorneys should provide a closing statement and fully comply with federal law in reporting the sale of real property to the IRS.10 If your firm is told that no funds are exchanged, and the IRS later determines that a sale has occurred, the parties will face substantial penalties for failure to report the transaction.
Capital Gains Tax
The seller will generally pay the capital gain taxes on any profits realized from the sale.
Who pays Capital Gains Tax?
You will not have any immediate tax implications however; you will have to pay taxes down the road when you try to sell the property. Tax on capital gain is triggered only when an asset is sold, or “realized”.
Do you have to pay taxes when someone transfers the property to you via Quitclaim deed?
What is Capital Gains Tax?
Capital gains treatment only applies to “capital assets” such as stocks, bonds, jewelry, coin collections, and real estate property.