Help needed with Gift Tax Return

[Tax Prep by Deb]

I have a client who in 1996 sold there home to their daughter and son in law. In order for the daughter and son in law to qualify for a loan, my client reduced the sales price of their home to the tune of about $100,000.00. Daughter and son in law lived in the home prior to purchasing it, for at least two years, but sold the home after only 5 months of the purchase.

My clients, the mom and dad still have not completed their 2006 tax return, I will be working on that right away. Daughter and Son also want me to prepare their 2006 return. The sale of the home 5 months later did generate a profit from purchase price to sale of about 100,000.00. In other words what mom and dad deducted when sold to child is what child ended up with as a profit.

My thinking is that mom and dad should have to file a gift tax return, because obviously they gifted 100,000.00 equity in the home. (and this is not just an asumption on my part, parents agree as well as comperative sales in the area).

My question is how do I show this on the gift tax return, and also does this mean that daughter and son now add the $100,000.00 gift of equity to the basis of the home which then makes the sale pretty much a break even thing?

I am no expert on the gift tax thing, so any thoughts and help would be greatly appreciated!

Thanks in advance,

Deb!

[zeke]

Yes, parents made bargain sale which resulted in a $100K gift & form 709 should be filed. Probably no tax due but reduction of unified credit.

Bigger problem - Daughter & son in law do NOT add $100K to basis & must report short term CG.

[Pacun]

I have a client who in 1996 sold there home to their daughter and son in law. In order for the daughter and son in law to qualify for a loan, my client reduced the sales price of their home to the tune of about $100,000.00. Daughter and son in law lived in the home prior to purchasing it, for at least two years, but sold the home after only 5 months of the purchase.

My clients, the mom and dad still have not completed their 2006 tax return, I will be working on that right away. Daughter and Son also want me to prepare their 2006 return. The sale of the home 5 months later did generate a profit from purchase price to sale of about 100,000.00. In other words what mom and dad deducted when sold to child is what child ended up with as a profit.

My thinking is that mom and dad should have to file a gift tax return, because obviously they gifted 100,000.00 equity in the home. (and this is not just an asumption on my part, parents agree as well as comperative sales in the area).

My question is how do I show this on the gift tax return, and also does this mean that daughter and son now add the $100,000.00 gift of equity to the basis of the home which then makes the sale pretty much a break even thing?

I am no expert on the gift tax thing, so any thoughts and help would be greatly appreciated!

Thanks in advance,

Deb!

Let's assume, parents bought house for $300K and sold it for $450 eventhough the house was valued at $550. If parents sold the house for $550, since they lived in the house for more than 2 years, no taxes would paid.

Currently, child has a short term gain of $100,000 and you want to see if filing a gift tax form, his gain dissipates. His basis will be the same even if mother files a gift tax.

[jasdlm]

I'm confused. Is the 1996 date incorrect, and everyone is just assuming it is 2006? Do you need to report the sale of the home to the kids on M&D's 2006 return? Were they renting to Daughter and Son prior to the sale?

[Pacun]

I'm confused. Is the 1996 date incorrect, and everyone is just assuming it is 2006? Do you need to report the sale of the home to the kids on M&D's 2006 return? Were they renting to Daughter and Son prior to the sale?

Nice catch. I am assuming that she meant that the sale occurred in 2006. Regarless of whether the son and daughter were renting, they didn't own it for 2 years.

[jasdlm]

Right, but parents might have depreciation recap on partial sale?

[Tax Prep by Deb]

Right, but parents might have depreciation recap on partial sale?

Sorry for the date problem. This did occur in 2006, not 1996 like I previously stated.

The parents diffinitely lived in the home long enough to exclude any gain. The children did not rent it from parents at any time, they lived with the parents in the home until they purchased it in 2006. At this time the parents moved out and children took over the home.

Let me through one more kink in the mix and see what you guys think. Parents lowered the price of the home so that children could qualify for the loan. The house was on the market prior to children taking the home, however it did not sell.

Five months later the home did sell for what the parents were originally asking. I do believe, but I haven't comfirmed this, that the children did give mom and dad the $100,000.00 when it sold.

This family has done everything wrong as far as I'm concerned. And I just want to make sure that when I do these taxes that I'm doing them right. So I'm spending extra time on this whole issue.

So here is my next question: Is there anyway to treat the $100,000.00 as a loan, e.g. seller finance? If so then the extra $100,000.00 would be added to the basis right?

I realize this is all a long shot and I'm hoping for miracles as I feel that the children in this have really been dealt a dirty deal. I do not believe they walked away with anything except possible capital gains tax on $100,000.00.

Any thoughts?

Deb!

[joelgilb]

Sorry for the date problem. This did occur in 2006, not 1996 like I previously stated.

The parents diffinitely lived in the home long enough to exclude any gain. The children did not rent it from parents at any time, they lived with the parents in the home until they purchased it in 2006. At this time the parents moved out and children took over the home.

Let me through one more kink in the mix and see what you guys think. Parents lowered the price of the home so that children could qualify for the loan. The house was on the market prior to children taking the home, however it did not sell.

Five months later the home did sell for what the parents were originally asking. I do believe, but I haven't comfirmed this, that the children did give mom and dad the $100,000.00 when it sold.

This family has done everything wrong as far as I'm concerned. And I just want to make sure that when I do these taxes that I'm doing them right. So I'm spending extra time on this whole issue.

So here is my next question: Is there anyway to treat the $100,000.00 as a loan, e.g. seller finance? If so then the extra $100,000.00 would be added to the basis right?

I realize this is all a long shot and I'm hoping for miracles as I feel that the children in this have really been dealt a dirty deal. I do not believe they walked away with anything except possible capital gains tax on $100,000.00.

Any thoughts?

Deb!

Hard to restructure a deal with hindsight, but what have they actually done so far? In other words, have the parents filed their returns for the year of the gift, were they expecting the kids to pay them back and didn't formally do the notes required? Was interest charged or AFR (applicable Federal Rates) used to calc same?

As an attorney, I often have clients that want to sell a house to their kids and gift a portion as well. When I structure the deal I have notes and an amortization schedule prepared, and deal with the interest on an annual basis and gift the interest and a portion of the principal until the note is fully gifted. This can be done quicker than you think with each parent making an $11,000 gift to kid and kid-in-law (I think that was the limit for gift tax exclusion in 2006, but double check). Couple of years and no more note and no basis issue either.

Even if the parents gave a gift letter to the kids for the mortgage company, a sale can still be shown as at FMV. Of course the gift letter is technically mortgage fraud when it is actually a loan, but mortgage companies don't have issues with this when they have 50% loan to equity and will not typically care if parents take a note back after closing. Generally a good idea to record the parents note and add a mortgage as well and have proper RE Sales contracts drafted.

Barring crossing their T's and dotting the I's, which probably didn't happen here, verbal agreements are valid.

Not trying to create a fiction here, but when you indicate that the kids paid back the 100K that parents lent, it suggests that this was not actually a gift. Find out what they were really doing. Maybe it was a loan and you can fix all the returns to support reality.

Joel

[Pacun]

File the return based on what actually happened or the actual intent on the date of the transaction.