Gift of Equity

[peggysioux5]

I think I know the answer to the following question, but am second guessing myself so want to be sure. Parent sells home to adult child lets say for $250,000 and gifts the equity of the home of $50,000 to the buyer. I know the sale price would be $250,000 but does the gift of equity of $50,000 come into play in the calculation of net capital gain? The closing statement for the sale shows in section "Amounts Paid by or in Behalf of Borrower" an amount of $50,000 and description of "Gift of Equity Seller Credit to Buyer. There was also a "Gift of Equity Letter" that states:

This gift of equity is being given to xxxxxx who resides at xxxxxx. The purpose of gift of equity is to cover buyer's down payment and closing costs. This is an outright gift, with no repayment expected or implied in the form of cash or by future services.

So does the gift of $50,000 play into the calculations when determining the capital gain on the sale or is gain strictly based on listed sale price less original purchase price plus any improvements?    

[easytax]

As the circumstances are a bit different and I am also interested in confirmation -- either way -- even if I am wrong, I submit the following as my scenario:

In your case, yes, since the 50K value is stipulated as for down payment, then it is "part" of sales amount and therefore taxable (just like "boot", money, other property traded, etc.).

In my case, the 'gift" was not shown, not specified, etc.. just given and was given partly as several 14K "gifts" to both the adult child and spouse by each parent (2 parents x 14K each to 2 others = 56K gift, (gift tax returns showing "gift's" of $57,000 split over two 709's ($28,500 each parent))). Parents, gifts value of property of $113,000 on a $325,000 FMV.

Sale to adult child and spouse of same property for $212.000 on sales agreement.   Using 212K sale results in no gain to parent when sold (would be true in any case due to personal residence, etc.) so all is reported in year of sale on sch. D. (212K is what attorney wrote up for sales agreement) with required interest (imputed interest, not an issue).

Am I correct using the $212,000 sales price or should I be thinking differently? Child and spouse already own $113,000 (from gift) with no gain to sellers (parents) and are buying property for $212,000 as I see it.

   Appreciate input as always ! THANKS

 

[DANRVAN]

1 hour ago, peggysioux5 said:

So does the gift of $50,000 play into the calculations when determining the capital gain on the sale or is gain strictly based on listed sale price less original purchase price plus any improvements?    

-The first thing you have to do is find you what the fair market value is.

-From that you deduct the actual consideration to determine the actual amount of the gift.

-The amounts on the Closing Statement only reflect what was agreed upon by the two parties and may differ from FMV.

[DANRVAN]

35 minutes ago, easytax said:

Am I correct using the $212,000 sales price or should I be thinking differently? Child and spouse already own $113,000 (from gift) with no gain to sellers (parents) and are buying property for $212,000 as I see it.

   Appreciate input as always ! THANKS

 

$212,000 sale price plus $113,000 gift = $325,000 FMV. That sound right.

[peggysioux5]

On ‎3‎/‎11‎/‎2016 at 8:29 PM, DANRVAN said:

-The first thing you have to do is find you what the fair market value is.

-From that you deduct the actual consideration to determine the actual amount of the gift.

-The amounts on the Closing Statement only reflect what was agreed upon by the two parties and may differ from FMV.

So, I received a copy of appraisal from taxpayer (parent who sold to adult child) and the appraised value was $325,000, sold for $250,000 and closing statement shows gift of equity of $50,000.  The home that was sold was a second home so taxpayer (parent) has to pay capital gains on the difference of $250,000 and her basis and closing costs and a gift tax return has to be filed for the $125,000 (the $50,000 of gifted equity and the difference between appraisal price and sold price of $75,000).  Please let me know if any of the above does not sound correct.

My question is more of a "why would the sale be handled this way?".  If they had sold the house for $200,000 and didn't provide the "gift of equity", the parent still would have to file a gift tax return for the $125,000, but would have to pay less capital gains on the sale of the property.  The only reason I can think of is adult child had no monies to pay the required down payment so mortgage insurance wouldn't apply.  I would appreciate others' input.

Much appreciated.

[jklcpa]

11 minutes ago, peggysioux5 said:

The only reason I can think of is adult child had no monies to pay the required down payment so mortgage insurance wouldn't apply.

 

^ this is the usual reason.

[peggysioux5]

Another question regarding the partial gifting of a residence.  If appraised value of home is $350,000 and taxpayer sold home to her adult child for $250,000 and gifted the remaining $100,000, are you required to divide the basis by the % by purchase/gift?  For example:

$350,000 appraised value

250,000 is 71% (selling price)

100,000 is 29% (gift)

So if basis is $175,.000 than the adjusted basis to carry to the gift tax return for the gifting portion of the home is $50,750.

Or can taxpayer put a zero basis on the gift and carry all $175,000 basis to the sale of the home to lower the capital gain on the sale of the home?

I would think one has to go with my first scenario but wanted to get input from knowledgeable tax preparers.

Thanks.

 

 

[DANRVAN]

The sale price is the amount of consideration given,  offset by basis to determine gain (no loss allowed).

The difference between fmv and consideration = gift. 

Suggest you review reg 1.1001-1(e)

[peggysioux5]

9 hours ago, DANRVAN said:

The sale price is the amount of consideration given,  offset by basis to determine gain (no loss allowed).

The difference between fmv and consideration = gift. 

Suggest you review reg 1.1001-1(e)

I understand the difference between the FMV and consideration = gift.  However, I have to show the sale of the asset on the parent's return which will show the $250,000 as the sale price, but I am unsure if the basis for the parent (to determine the capital gain that will have to be paid) has to be adjusted because a portion of the home was "gifted" to adult child and the gifted portion would also have some of the basis, is that not correct?  When I file the gift tax return, I also have to determine the basis of the gift (which is the "basis" in the hands of the parent).  My uncertainty is due to the "partial" gifting of the home.  Thus, my question above about splitting the basis.  Input would be appreciated.

[peggysioux5]

Thank you for pointing me to reg. 1.1001-1(e) and it would appear that the full basis that the parent has in the home would be used in the calculation to determine capital gain.  And just to make sure I am understanding, then would I have a zero basis showing on the gift tax return that is required to be filed on the portion that was gifted?

[DANRVAN]

Correct, no basis to the gifted portion.

[peggysioux5]

48 minutes ago, DANRVAN said:

Correct, no basis to the gifted portion.

Thank you.....very much appreciated.