Chris R Posted February 24, 2016 Report Share Posted February 24, 2016 I first have to say thank you to all of you that post on this board. It has helped me immensely. As a one person office, it is nice to be able to research and get answers to questions. At the big firm I was at I always had someone to bounce ideas off of or answer questions I had, but on your own makes things a little more challenging. This board and others like it have given me clarification and validation on things. So thank you. My question deals with the sale of a rental to a related party. I thought I had it figured out after researching it here and elsewhere, but I am just not sure. Client sales rental home to daughter who has been the renter for two years. Home has been depreciated and income accounted for correctly. Sale price of home on closing statement/1099s is 205k. Client gave me a appraisal of the home which was done just prior to the sale and the appraisal says home value is 318k. On the closing statement there are the usual closing costs but also a line for gift of equity for 41k. Trying to figure out the sale portion and the gift portion. Is the sale price really 205k less the 41k? Or do I do a percentage so in other words 80% was sold and 20% gifted and adjust numbers accordingly? What about the appraised value? Should the gift really include the 41k and 113k (the difference between sale price and appraised value). I get that there will be taxable gains/depreciation recapture but I am not sure on the sales price. The equity gift on the closing statement is throwing me off. Thank you so much in advance for any thoughts. Quote Link to comment Share on other sites More sharing options...
DANRVAN Posted February 24, 2016 Report Share Posted February 24, 2016 The gift portion is fmv less the amount of full and adequate consideration. Ask your client how they came up with the sale price on the closing statement and why so far off from the appraisal. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 24, 2016 Report Share Posted February 24, 2016 I don't understand your differences from the appraisal to amounts at settlement either, and I think you should find out why there is this large difference between the appraisal and the selling price. It doesn't make sense to me or follow the pattern of ones I've had experience with. The ones I've seen reported the exact appraised value as the selling price and the gift of equity was exactly 20% of that. Then the sale price from the settlement sheet is used on the taxpayer's return just like it was any other sale of property to an outsider. If going by the settlement sheet, the sale price you would report is the $205K, and the gift of equity is 20% of that, the $41K. The gift of equity is considered a downpayment so that the daughter could use that to qualify for the mortgage and to avoid having to pay PMI. She might also have been able to avoid having to escrow amounts for r.e. taxes and insurance. Then, the gift tax return(s) would report the gift given of $41K, apply the annual exclusion to that, calculate the potential tax, and offset the tax by using the unified credit so that the gift tax to be paid is zero. I pulled up the file for the last one I did from 2012 where the appraisal and selling price on the settlement sheet were both reported as 210K, and taxpayer and spouse each gifted 10% of value to the son for a total of 42K, and the $42K was reported on the settlement sheet as the gift of equity. TP and SP split the gift and each filed a gift return reporting a taxable gift of $8K ($21K less the exclusion of $13K), then used the unified credit to zero out the tax on the 709s so that no gift tax was paid. 1 Quote Link to comment Share on other sites More sharing options...
Chris R Posted February 24, 2016 Author Report Share Posted February 24, 2016 Judy, what you described as the usual pattern is exactly what I expected to see and what I currently have on the return. But then my client gave me the appraisal with the 318k value and that's where I got a little confused. My clients daughter wanted to buy the home for just what my client owed on it. They owed around 120k. Plus the daughter could qualify for the 205k and that price would give her money to fix up some things on the home. Hence the 205k. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 24, 2016 Report Share Posted February 24, 2016 50 minutes ago, Chris R said: Judy, what you described as the usual pattern is exactly what I expected to see and what I currently have on the return. But then my client gave me the appraisal with the 318k value and that's where I got a little confused. My clients daughter wanted to buy the home for just what my client owed on it. They owed around 120k. Plus the daughter could qualify for the 205k and that price would give her money to fix up some things on the home. Hence the 205k. From this new information, I'd guess that maybe the parents and daughter worked out a price they were both happy with. To summarize what I'm hearing: Parents show the 205K sale, give away 41K, net of 164K before selling expenses, pay off their mortgage of 120K and end up with some cash to pay the tax effect and have some in their pocket. Daughter gets a house with a mortgage that she can afford and has the cash for fixing up. The problems I see are the gifting for less than fair value, and the sale to a related party for less than fair value. With the latter, the parents lose the benefit of capital gain rates on this sale. Whatever gain they are reporting will be at ordinary rates. 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 25, 2016 Report Share Posted February 25, 2016 Adding to my answer above, the way this worked out, the total value of the gift to the daughter appears to be $154K. It is the gift of equity of $41k shown on the settlement sheet plus the difference between the appraised value of $318K and the $205K selling price. The proof is the gift is the $318K appraised value minus the 164K for the portion of the house reported on the settlement sheet shown as being purchased from the parents (205-41). (318-164 = 154). You have to attach the appraisal to the Forms 709 so there's not much you are going to be able to include with those filings justify a reduction in the value down to the figure used as the selling price. On a percentage basis, the daughter purchased 51.57% of the home and was gifted a total of 48.43% of it. 1 Quote Link to comment Share on other sites More sharing options...
DANRVAN Posted February 25, 2016 Report Share Posted February 25, 2016 I agree with Judy, FMV less actual consideration = gift. 1 Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted February 25, 2016 Report Share Posted February 25, 2016 3 hours ago, jklcpa said: Adding to my answer above, the way this worked out, the total value of the gift to the daughter appears to be $154K. It is the gift of equity of $41k shown on the settlement sheet plus the difference between the appraised value of $318K and the $205K selling price. The proof is the gift is the $318K appraised value minus the 164K for the portion of the house reported on the settlement sheet shown as being purchased from the parents (205-41). (318-164 = 154). You have to attach the appraisal to the Forms 709 so there's not much you are going to be able to include with those filings justify a reduction in the value down to the figure used as the selling price. On a percentage basis, the daughter purchased 51.57% of the home and was gifted a total of 48.43% of it. 2 hours ago, DANRVAN said: I agree with Judy, FMV less actual consideration = gift. Agree with both. Quote Link to comment Share on other sites More sharing options...
Chris R Posted February 25, 2016 Author Report Share Posted February 25, 2016 Thanks everyone for the answers. Much appreciated. Quote Link to comment Share on other sites More sharing options...
grandmabee Posted February 29, 2016 Report Share Posted February 29, 2016 save for later Quote Link to comment Share on other sites More sharing options...
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