Talk to a tax adviser ASAP!!!!!

Yes, get some advise...
It is not your son's house, it is your and your DH's house. Do you have any type of written contract that your son is buying the house?
Do you want to do a 1031?

I agree with cmarlin. The house legally belongs to you. Unless you have some kind of contract with your son, he is just a renter.

My son is entitled to all profits made from the sale but I don't want to be taxed on the profit.

Is what you mean, that you believe your son is morally entitled to the profits and you intend to give them to him? And therefore you want to avoid paying taxes on the profit, since you won't get any of it (or aren't intending to keep any of it)?

Unless you do a 1031 (sell his home, and buy a new one in his new neighborhood), you may have to pay taxes on the profits.

If the 1031 isn't possible (maybe you'd like him to use the profits to buy a house in his own name, thereby ending the entanglement in a good way), then maybe you can get a tax person to help you figure out what those taxes you'd pay would be, and then deduct that from the profit, and give him whatever's left. It means he has less profit, but it would certainly be fair.

Also, you might discuss w/ a tax person what it would take to sell your equity in the home to your son now, so that he's the sole owner of record when he sells after he moves.

Yeah, talk to a tax advisor because you have several questions I see.

1) Who is entitled to the profits. You, as owners. He can't sell it, you can. If you give him the profits or he takes the sales proceeds, then the IRS is likely to consider it a gift from you to him. If it's more than $12000 (or $24000 since you're married), then it's subject to gift tax generally speaking. Alternatively, if you deeded him the house before the sale, then that transfer would be considered taxable.

2) Capital gains exclusion. If there are profits, you may qualify for the $500000 capital gains exclusion. However, you must have lived in the house 2 of the past 5 years (I believe-check rules). Sounds like you have not, so you would not be entitled to claim this, unless you moved in for 2 years.

You might be able to sign a quit claim deed over to him and get in on file at the courthouse before the house sells.

There's likely an alienation clause in your mortgage that would prohibit Quit claiming the house to your son. Such a move could trigger a default & your lender would have the right to call the Note due & payable immediately even if you're current on your payments. Such an action is known as a "Technical Default" in the same category as failing to keep insurance on the property. It's a very good idea to read your loan documents thoroughly before moving forward with any action(s).

/tricia

bacon,

Get all your information together and find a good accountant. Not only will YOU owe taxes on the sale, but all those mortgage payments your son made on YOUR house are considered to be TAXABLE income to YOU.

You might also need a lawyer if you didn't get an investment property mortgage for the house.

Why can't they sell it, pay the taxes and have the son pay the parents back for the amount of the taxes? He's been paying the mort, repairs and they are letting him have any profits. While I realize the parents (sorry to talk about OP in third party) are trying to help the son, seems to me they have and this is the price he'll pay. (I think its great that they expect a profit!)

I wouldn't worry about the mortgage company finding out about the quit claim deed if you are putting it on the market. We did that with our house for over 3 years and the mortgage company never checked.

tx happy camper,

Cough, cough, clearing throat...

"I wouldn't worry about the mortgage company finding out about the quit claim deed if you are putting it on the market. We did that with our house for over 3 years and the mortgage company never checked."

Some of us here on the forum are buyers, some are sellers, some are RE agents, & some are lenders (that would be me). Do you also not pay your taxes & hope that the IRS doesn't "check"?

/tricia

The original poster would not be doing anything that would be a detriment to the mortgage company. They would be properly identifying the true owner of the property so the rightful owner would be the one paying taxes on the sale proceeds.

I'm well aware of who frequents the boards. Thank you for your concern about my taxes but it's really none of your concern--I didn't ask for your opinion on my ethics.

I think there's a good chance the IRS would consider the son the equitable or beneficial owner of the house since he pays for the mortgage and repairs. That means no capital gains tax will be due upon the sale of the house (provided the other requirements for the exclusion are met).

The Tax Court has ruled that an equitable or beneficial owner of a primary residence is entitled to claim the mortgage interest deduction for federal tax purposes (Uslo v. Commissioner, [Tax Court Memo 1997-551 (December 16, 1997)]). The fact pattern in Uslo is strikingly similar to the OP's situation. One set of family members were the owners of record of the house and also the only names on the mortgage papers. The other set of family members lived in the house, paid all the mortgage payments and also were responsible for maintenance and repairs. They claimed a deduction for the mortgage interest on their federal taxes, and this was initially disallowed by the IRS. However, they eventually prevailed in the Tax Court.

It's reasonable to assume that the same standard used in Uslo would be true as well for the exclusion from capital gains tax.

In Uslo, the parties has executed a quitclaim deed which was intended to be backdated to the original purchase of the property. Even though it was never recorded, the Tax Court found it additional evidence of the parties' intentions that the couple who paid the taxes, etc were the equitable owners of the property.

That being so, it would probably be a good idea for the OP to follow happy camper's suggestion and quitclaim the property to their son, but not record the document, in case the question of beneficial ownership should ever arise in the future.

Here is a link that might be useful: MORTGAGE INTEREST DEDUCTIBLE BY BENEFICIAL OWNER OF PROPERTY

As lenders, we ask our appraisal companies to research the ownership of a property for the past 3 years. If the property shows a recent deed transfer, and then is listed for sale, it is usually looked at as a "Flipped" property and that could cause problems.

We look very closely at properties and their current sale value, if they are flipped. I know that the OP is not "flipping" properties, but this is a problem that could be encountered by quit claim deeding the property.

I agree and that's why I think the OP should execute a quitclaim deed but not record it in accordance with what was done in the Uslu case.

"OP should execute a quitclaim deed but not record it in accordance with what was done in the Uslu case."

Depending on the state the deed might be made invalid.

It doesn't matter whether or not the deed is "invalid" as a legal instrument. The unrecorded quitclaim deed in the Uslu case discussed in my prior post helped convince the Tax Court that that the party who pays the property taxes and mortgage is the beneficial owner of the home, despite the lack of legal title.

We shouldn't lose sight of the OP's problem. She doesn't want to pay capital gains tax on the profit from the house when it's sold. She's going to have to (because she doesn't live in it) unless she and her son can show that while he's not the legal owner, he is the beneficial owner since he meets the guidelines set forth in the Uslu decision -- son pays the mortgage directly to the bank, son pays the property taxes, son is responsible for maintenance and repairs, and the parties have executed an unrecorded quitclaim deed as proof that everyone considers the son, not the parents, to be the owner of the house.

The OP's son has already done everything listed in Uslu except for the unrecorded quitclaim deed. That should be taken care of ASAP.