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'Equity Gift' in house sale transaction


jasdlm

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Client bought house for $375k and son moved in to house.  Son provided care for his ailing parent in the house.  Community spouse continued to live in marital residence.

Ailing parent died, and client sold both the marital house and the house son was living in.  The latter was sold to son.

Client made $75,000 on the sale, but this is because the house appraised for $75k more than the original purchase price, and client 'gifted' $50k of equity to son which acted as the down payment.  Shows on the settlement statement as 'equity gift'.

I think that client has $75k gain, but I wonder if anyone has any thoughts otherwise.  PR exclusion used on marital house, although perhaps since ailing parent lived with son in 2nd house for exactly 2 years before death, I could use one spousal exemption of $250 on the marital residence and one spousal exemption of $250 on the second house?  Tricky thing is they were JTWROS on both.

Thanks much in advance!  I appreciate any thoughts.

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13 minutes ago, DANRVAN said:

I am confused as to who is involved in this transaction? Client, son, ailing parent, community spouse, marital house?

 

I agree, the explanation and terminology used are too fuzzy and imprecise to reach conclusions other than I am glad they aren't my clients.

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I'm confused by the post and the calculation of the gain on the house the son was living in. Maybe I misinterpret the wording "community spouse."  Is this in a community property state? If so, the house was sold after one of the spouses died, and because it was titled in joint name in a community property state, doesn't the surviving spouse get a 100% step up in basis up to the $450K appraisal value, assuming that the appraisal was within a reasonable amount of time near the date of death?  I don't think there is any gain.  Even if it isn't community property, the surviving spouse would get a step up of 1/2 of the ownership to the appraised value, so the basis of the survivor in a noncommunity property state would be $412.5K, and still wouldn't be a gain after considering the gift of equity.

Also, with the princ residence if community property,  the surviving spouse would also get a 100% step up to FMV on the principal residence too.  Like the sale of the house to the son, this sale of the principal residence also took place after death of one spouse, so even if there was a gain (I don't think there is), the surviving spouse can use $500K of gain exclusion on the principal residence if all the requirements are met AND the sale took place within 2 years after the date of death.

Edited by jklcpa
clarity, maybe lol
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