Follow The Bouncing Townhouse...

Q. Dear Jeff, I bought a townhouse in Florida for $60,900 in 1985. After graduating from college I lived in the townhouse for about 14 years. About 7 years ago I quit claimed it to my mom so she would have a place to live and I wouldn't have to worry about it since I had moved to VA. At that time I owed about 48,000. My mom refinaced it and now the mortgage is $64,000.

Two years ago my mom wanted to move in with me when she retired and quit claimed me back the Townhouse in payment for living at my residence. About 4 mos. passed and she want to go back to FL and she moved back in the Townhouse.

Just recently she called and said she can no longer afford to live in FL and wants to sell the townhouse. We both agreed to put it on the market. The selling price will be around $185,000. I told my mother that I would give her 70% of the monety we get and I would take 30%. Will I have to pay a capital gains tax? If I do how do I figure out the cost basis? Will it be the fair market value from 2 years ago or the amount she owed when it was quit claimed?

A. Wow, what a mess!

I don't think you realized when you were transferring the ownership back and
forth that it was the same as making a gift.

There are two issues here. First, the gift was in excess of the amount you
can give annually without being affected by gift taxes. So, potentially, the
IRS and possibly the states, can come back to you for taxes and penalties on
all of those transfers. I'm not sure how many years they would go back....

Second is the tax issue. Whenever a gift is made, the person receiving the
gift inherits the cost basis of the person giving the gift. That makes this
part easy because your cost basis is the amount you originally paid for it
($60,900) plus any money spent on improvements.

But wait. There is a lifetime exclusion of capital gains tax on your personal residence up to $250,000 per lifetime. The owner must have used the
property as their primary residence in two out of the last five years.

If that's the case, and it sounds like it would be for your mother, then she
won't owe any capital gains taxes on it. The problem is that all of the transfers could impact that two out of five years.....

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