Capital Gain tax on non-main home

Hi all,

First post here.

My bride to be (in 1 week) owns a home out of state. She doesn't live in it, pay the mortgage, or really have anything to do with the place. Her name is on the loan docs and title, but her mom pays the mortgage and manages the property. No one lives in the house. Her mother also owns two other homes in her own name, one of which is her primary residence, and the other is a vacation rental property.

(I'm estimating the numbers here bc I don't know them yet.) The house was purchased for $200k and is now appraises at $300k. A year or two ago, the mother pulled out $100k and refied the loan for one reason or another. Net result is that the balance on the loan is roughly the same as, if not a bit higher than the current appraisal value. And, the local market is trending downward, no big surprise.

I have several questions.

1) Should I be worried about this piece of property when trying to purchase a house of our own if we apply for a loan jointly? If I apply for a loan in my name only, does the problem abate at all?

2) Is there any way to avoid paying capital gains tax on the house without lying? It is not a "main home" and it would be painfully obvious just based on the face of a tax return that the house is in AZ and the residence of the owner is in CA. My main concern with paying capital gains tax here is that there is no equity left in the house, so by selling it, we (or someone) would incur roughly $30k in tax liability, in addition to the underwater portion of the mortgage.

3) Are there negative consequences that I am not considering? Assume I have listed all of the concerns that I have in the first two points above. What am I missing out on?

I am just starting to take over the finances for the two of us, and I would like to start out on a clean/well-informed slate. We are not financially strapped ($200k+ combined income), but we do not have any assets other than $20k or so in savings, and are just getting started in life really. I have debt ($120k student loans) but can manage that just fine. My priorities are avoiding tax liability where possible, ABSOLUTELY avoiding legal liability, being audit-proof, and building a solid financial foundation to build on for the next 50 years.

Thanks in advance for your help. Any comments are welcome. I don't like the situation at all, but am trying to make the best of it.

Hi all,

First post here.

My bride to be (in 1 week) owns a home out of state. She doesn't live in it, pay the mortgage, or really have anything to do with the place. Her name is on the loan docs and title, but her mom pays the mortgage and manages the property. No one lives in the house.

Why isn't this home either for sale or rented?


Her mother also owns two other homes in her own name, one of which is her primary residence, and the other is a vacation rental property.

(I'm estimating the numbers here bc I don't know them yet.) The house was purchased for $200k and is now appraises at $300k. A year or two ago, the mother pulled out $100k and refied the loan for one reason or another.

You indicate Mom did this. How can Mom use a house she does not own for colateral on an loan? Daughter had to be part of this scheme.


Net result is that the balance on the loan is roughly the same as, if not a bit higher than the current appraisal value. And, the local market is trending downward, no big surprise.

I have several questions.

1) Should I be worried about this piece of property when trying to purchase a house of our own if we apply for a loan jointly?

Maybe, can you and your sposue make both mortgage payments? Forget Mom is actually making the payment. The mortgage is the responsibility of your fiance.


If I apply for a loan in my name only, does the problem abate at all?

Probably. The lender will look at your ability to make the payments.


2) Is there any way to avoid paying capital gains tax on the house without lying? It is not a "main home" and it would be painfully obvious just based on the face of a tax return that the house is in AZ and the residence of the owner is in CA. My main concern with paying capital gains tax here is that there is no equity left in the house, so by selling it, we (or someone) would incur roughly $30k in tax liability, in addition to the underwater portion of the mortgage.

I suppose if you were to do a 1031 exchange. But this type of deal is not straight forward. But you still would have a similiar house to contend with.
Here is a link for you to learn more: http://www.1031exchangemadesimple.com/

3) Are there negative consequences that I am not considering? Assume I have listed all of the concerns that I have in the first two points above. What am I missing out on? [/quote]

Yes, even if you were to sell the house your bride owns for the mortgage value, there are some issues. This sounds like a rental house. As such depreciation has been (or should have been)taken. That depreciation amount would now be considered income. The depreciation in effect has becomes an interest free loan. Taxes were not paid on the depreciation, and now the IRS says they want to tax the amount of depreciation that was taken or should have been taken.


I am just starting to take over the finances for the two of us, and I would like to start out on a clean/well-informed slate. We are not financially strapped ($200k+ combined income), but we do not have any assets other than $20k or so in savings, and are just getting started in life really. I have debt ($120k student loans) but can manage that just fine. My priorities are avoiding tax liability where possible, ABSOLUTELY avoiding legal liability, being audit-proof, and building a solid financial foundation to build on for the next 50 years.

Thanks in advance for your help. Any comments are welcome. I don't like the situation at all, but am trying to make the best of it.

You and your new bride should build an emergency fund equal to about 6 months of living expenses before you make that dream home purchase. That can be somewhat difficult when you do not know what your living expenses are. Here is a link to a budget calculator that can help you with some estimates. Your budget needs are most likely going to vary.
http://www.crown.org/Tools/Calculators/Budgeting_SpendingPlan.asp