Ownership Test


W

wallace_cpa

I have a new client this year who wanted tax advice on a
home sale. When he originally purchase the home, he could
not qualify due to bad credit. His parents stepped in and
obtained the loan in their name at the same time putting the
title of the property in their son and spouses name. The
mortgage payment was made by the son as well as an initial
down payment of around $40K. Later, pursuant to a divorce,
the son had the title removed from his own and spouses
names. This was done through an attorney and proper notice
was given to the spouse so I'm assuming this was legal. The
son waited 5 years, had the title put back in his own name,
again legally, and then sold the home for a $350K gain.

I am advising him that he has a problem with the ownership
test and cannot claim an exclusion. Even if he did qualify,
he could only exclude $250K. He also informed me that he
has been deducting the taxes and interest on the note. I
informed him that he could deduct the real estate taxes but
not the interest as he is not legally obligated to repay the
note.

Does anyone see any other facts in this case that I'm not
seeing?
 
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S

Stuart A. Bronstein

I have a new client this year who wanted tax advice on a
home sale. When he originally purchase the home, he could
not qualify due to bad credit. His parents stepped in and
obtained the loan in their name at the same time putting the
title of the property in their son and spouses name. The
mortgage payment was made by the son as well as an initial
down payment of around $40K.
So there was an agreement that son was the real owner and
that he would make sure all payments were made?
Later, pursuant to a divorce, the son had the title removed from
his own and spouses names. This was done through an attorney and
proper notice was given to the spouse so I'm assuming this was
legal. The son waited 5 years, had the title put back in his own
name, again legally, and then sold the home for a $350K gain.
I don't understand what you mean. If title was in son and
wife's name, that couldn't be changed without both son and
wife signing off, or a court order.

Who became the title owner then - the parents? Why? Was
there an agreement between the parents and son at the time?
I am advising him that he has a problem with the ownership
test and cannot claim an exclusion. Even if he did qualify,
he could only exclude $250K. He also informed me that he
has been deducting the taxes and interest on the note. I
informed him that he could deduct the real estate taxes but
not the interest as he is not legally obligated to repay the
note.
Not necessarily. He may have an enforceable contract with
his parents to make the payments. He may have even had an
enforceable contract with them that he was the true owner.
It would have been better if it had been documented
properly. But, assuming you can establish proper agreements
with the parents, I don't see any reason not to claim the
exclusion.

Stu
 
H

Harlan Lunsford

I have a new client this year who wanted tax advice on a
home sale. When he originally purchase the home, he could
not qualify due to bad credit. His parents stepped in and
obtained the loan in their name at the same time putting the
title of the property in their son and spouses name. The
mortgage payment was made by the son as well as an initial
down payment of around $40K. Later, pursuant to a divorce,
the son had the title removed from his own and spouses
names. This was done through an attorney and proper notice
was given to the spouse so I'm assuming this was legal. The
son waited 5 years, had the title put back in his own name,
again legally, and then sold the home for a $350K gain.

I am advising him that he has a problem with the ownership
test and cannot claim an exclusion. Even if he did qualify,
he could only exclude $250K. He also informed me that he
has been deducting the taxes and interest on the note. I
informed him that he could deduct the real estate taxes but
not the interest as he is not legally obligated to repay the
note.

Does anyone see any other facts in this case that I'm not
seeing?
Your facts speak for themselves, and your analysis is dead
reckoning.

(Is this guy in California? (grin)

ChEAr$$$,
Harlan Lunsford, EA n LA
11 Apr 2005
4 days and counting...... down.....\
 
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P

Phil Marti

I have a new client this year who wanted tax advice on a
home sale. When he originally purchase the home, he could
not qualify due to bad credit. His parents stepped in and
obtained the loan in their name at the same time putting the
title of the property in their son and spouses name. The
mortgage payment was made by the son as well as an initial
down payment of around $40K. Later, pursuant to a divorce,
the son had the title removed from his own and spouses
names. This was done through an attorney and proper notice
was given to the spouse so I'm assuming this was legal. The
son waited 5 years, had the title put back in his own name,
again legally, and then sold the home for a $350K gain.

I am advising him that he has a problem with the ownership
test and cannot claim an exclusion. Even if he did qualify,
he could only exclude $250K.
That's the limit, except for a joint return.
He also informed me that he
has been deducting the taxes and interest on the note. I
informed him that he could deduct the real estate taxes but
not the interest as he is not legally obligated to repay the
note.

Does anyone see any other facts in this case that I'm not
seeing?
It looks to me like you're getting confused because of all
the ownership changes. (I know I am.) Your remark about
the real estate taxes makes me think that he had some sort
of ownership in the home during the 2 of the 5 years
preceding sale. If he did, he meets the ownership test
regardless of what was going on with the mortgage.

If he was deducting mortgage interest he wasn't allowed, he
needs to amend the open years.
 

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