Q Dear Rick:
I got a mortgage for my daughter and her husband three years ago because she could not get one. They sold the house this year for a profit. I did a quit claim deed and put her name on the house along with mine. I never lived in the house; she made all the payments and also paid the taxes. My question is will I have to pay any taxes on the profit next year?
A Dear Mary:
The Internal Revenue Service would look at who owned the property. In most cases, the IRS would determine who owns the property based upon the 1099 issued at closing. For real estate transactions, a 1099 is issued to the seller. Therefore, in your particular case, the first issue you would need to consider is whose name and Social Security number are on the 1099. If your daughter’s Social Security Number was used, then she should be the one who reports the tax consequences. That is actually good news because more likely than not, she would not have to pay any taxes because it is her personal residence and the gain is not sufficient enough to be taxed. On the other hand, if the 1099 was issued in your Social Security Number, then the IRS would presume that the property is yours and thus, you would have to pay the taxes. Unfortunately, because this is not your primary residence, you would not be fortunate enough to receive a tax break. You would be taxed on the entire gain.
If the 1099 was issued to you as opposed to your daughter, you can potentially have the 1099 reissued by the title company. That would certainly make things easier for you. Filing an amended 1099 is very simple and straight forward.
If as you said, your daughter made all the payments on the mortgage and property taxes, the 1099 is in your name and the title company won’t change it, you can take the position that the house was always your daughter’s and your name was only on it for convenience purposes. If this is the case, you can issue a 1099 to your daughter for the exact same amount of the 1099 you received. Then, when you file your 2016 tax return, you can attach your daughter’s 1099 along with an explanation. The 1099 you received will offset the 1099 you issued to your daughter; thus, no tax consequences for you. The key is to make sure you keep documentation such as proof of your daughter’s payment of the mortgage and the property taxes in case you are audited.
Whenever you mention audit, people immediately get nervous; that should not be the case. Surprising to many, if you have the appropriate documentation, the IRS is not necessarily difficult to deal with. On the other hand, if you take a tax position and you don’t have documentation, then you can have issues. However, in this particular case, I believe the daughter should be responsible for the taxes and I believe with the proper documentation, the IRS would agree.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org