Question for anyone with the experience, knowing that eventually we will have to go to an accountant...

Selling a house that’s not our primary residence, so we’re in for the 15%, plus whatever the state’s share is.

But my wife’s parents have a 25k lien on the house from when they loaned the initial down payment to my wife years ago.

My google-fu is weak, and our attorney friend admits he’s not sure...says to check with an accountant. Which we will as the time gets closer. We know that the roof, new HVAC, new floors, etc will help.

Anyone know if the lien is subtracted from the total prior to the capital gains tax? Either way, that albatross is going ASAP. Just want to make sure we ask the right questions as we go.

Not a lawyer or accountant, but my understanding is that it's a pretty simple equation: What the purchase price was subtracted from what your sale price is. How it was financed - what you are calling the "lien" - is how the money was raised, but has nothing to do with the "gain".

How you account for the improvements will be a matter for the accountant also. If they could be considered "repairs", then my understanding (again, not an accountant) is that they are not deducible. Improvements (room addition, deck addition, things that obviously add to the property) can offset the gain. Roof, new HVAC, new floors may not qualify, as maintaining them is not an "improvement". Although they may add to the sale price.

probably not what you want to hear.... perhaps someone else will correct me.

No, the lien is not added to the basis of the home or subtracted out at any other point when calculating the gain.

Did you ever rent it out and claim depreciation on it?

quote:

Originally posted by trapper189:
No, the lien is not added to the basis of the home or subtracted out at any other point when calculating the gain.

Did you ever rent it out and claim depreciation on it?

I don’t have the info infront of me, but we do claim depreciation on repairs, not improvements. At least that’s what I remember off the top of my head.

Traveler is correct, a lien has no effect on a taxable capital gain, the main reason being is that you have to pay back the associated note, unless they forgive it (but I think it's regular income, not cap. gains). Selling price minus buying price minus cost of capital improvements is the effective capital gain (what it is worth now minus what it was worth then, and what it cost to get to "now"). There are ways in which these figures might be adjusted depending on the laws in your area and exactly when things occurred, often govts. will tweak things to "spur the economy," etc. so that the garage that was added on in 1978 may be worth more (or less) than the same garage added on in 1988. It may also be that depreciation taken on certain property improvements can be a factor. The cost of selling the property (realtor commission, advertising, etc.) is also a factor that affects the net capital gain. Keep good records, and secure that accountant sooner rather than later.

Trapper asks a valid question: Is this an investment property - i.e., rental? And if so, over the years, did you claim depreciation? The depreciated value will become your "basis" cost, thereby increasing your capital gain.

Years ago, when I married my ex-wife, we rented her property for a year or two before we got tired of it. When we started, I did not want a depreciated basis, so I did not claim depreciation. When we sold, the basis was what she paid for the property. FWIW, that didn't come into play as we resided in it for 2 of the previous 5 years. (Which, in hindsight, probably means I should have claimed the depreciation.)

I now have another rental property. I researched the depreciation, and found that I couldn't not depreciate it. In other words, I had to take the depreciation. Not sure if - or how - this would apply in your case as I don't know your details. But you should definitely seek the advice of someone more knowledgeable than your internet imaginary friends.