Income tax on repayment?

November 19, 2017 2:31 AM

Will I pay tax on my daughter's repayment of the loan we took out to buy her house?

When our daughter was in grad school, we were paying her rent and figured out that it would be cheaper to buy her a small house (we live in a city and were able to buy a row home for a very low price). We took out a line of credit (secured with our house) and put the deed in her name and mine. Now that she is finished school, she wants to take on the rest of the debt with her own mortgage on the house, and we're putting it completely in her name.

I think it's just a repayment of debt; alternatively, it might be that one-time gift from a family member that you don't have to declare. We don't have much actual money. Any suggestions? Places to look for answers?

posted by Peach to Work & Money (5 answers total)

Best answer: It's either a repayment of debt, or more likely given how you structured it, she is buying your share of the property from you for no gain, so there is no taxable event. Actually you could probably take a capital loss if you had any expenses associated with the whole thing.
posted by JPD at 4:40 AM on November 19, 2017 [1 favorite]

This sounds like a case where its worth the few dollars to talk to an accountant or lawyer who can help advise you of the implications and how to structure the repayment so it works out best for everyone.
posted by nalyd at 6:45 AM on November 19, 2017 [1 favorite]

borrowing money - not a taxable event
repaying the loan - not taxable
putting her on as a co-owner - not taxable (she would not become owner until she was the survivor)
taking your name off - Might be regarded as a gift, to the extent of the equity only. But gifts are exempt from reporting and from gift tax to the extent of $28,000 per year (assuming that "we" means married parents). If the equity is more than $28,000, an advisor might recommend a promissory note from her to you, payable over 10 years or whatever, with annual forgiveness of the debt in the amount of $28,000 per year.
posted by megatherium at 7:11 AM on November 19, 2017

Unless the house has increased in value to a degree implausible even in Manhattan or the Bay Area, even the gift of the equity wouldn't exceed the lifetime gift exemption. You would have to report it if it exceeds $28K (IIRC), but it wouldn't be taxable.
posted by praemunire at 9:59 AM on November 19, 2017

Best answer: Sounds like you gifted her half of the house and are now selling her the other half. If the sales price exceeds your basis you'd have a capital gain. (I don't think you could take a loss because it's a related party sale)
posted by jpe at 12:47 PM on November 19, 2017