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gifted Equity in house sale


WITAXLADY
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Sister rents family house to sibling.

Finally they get financing if sister gifts $27,000 equity.

Original purchase price $120,000, sold for $114,000 (- $27,000)

so seller has loss but doesn't show - depending on how the $27,000 is used

Cost of disposition? as their is loss on the sale..

Thank you

D from green Northcentral WI!

No gift tax as H/W gifting to H/w

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No loss allowed if sold to a related party.  I believe the unallowed loss is added to the new owner's basis provided she holds on to the house for a specified period of time.  You can research that in your spare time since it won't affect anyone's taxes in 2021. (Spare time--what a concept!)

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15 hours ago, Sara EA said:

No loss allowed if sold to a related party.  I believe the unallowed loss is added to the new owner's basis provided she holds on to the house for a specified period of time.  You can research that in your spare time since it won't affect anyone's taxes in 2021. (Spare time--what a concept!)

Sara I am really impressed, I couldn't even decide what the questions were?🙄

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There may be more to this. 

Owner was renting to a relative so depreciation allowed or allowable may come into basis calculations. Was this considered? One has to question whether the rental was at fair value, because every day of rental to relative at less than FMV is considered personal use.  If less than FMV, how much depreciation was allowed or allowable?  If at FMV, then depreciation will factor into the calculations.  So, was this taken into consideration to arrive at the $120,000 of basis, and is there really a loss?  Has depreciation recapture been considered?  I doubt this will turn into a gain because the selling expenses weren't discussed, but if there is a gain, that gain will be taxed at ordinary rates because the sale is to a related party.

Regarding a loss, Sara is correct. Sec 1015(a) is where the tax code places a limitation on the gifted basis so that a loss cannot be transferred by gift from donor to donee, and no one can ever deduct that portion of a loss. If and when the recipient disposes of the property and does incur a loss using the lower basis under the dual basis rule, the loss is limited to the the amount of loss beyond the reduced (dual) basis for computing the loss.  In other words, the recipient would never get the benefit of the decline in value from the original donor's cost to its lower FMV at the time of the gift, but CAN take loss beyond that once in his or her ownership.

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1 minute ago, jklcpa said:

every day of rental to relative at less than FMV is considered personal use

A reasonable discount for a good tenant is allowable because you know they'll take better care of it than many other tenants. I'm comfortable with a 25-30% discount for relatives not violating the FMV rule.

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4 minutes ago, Abby Normal said:

A reasonable discount for a good tenant is allowable because you know they'll take better care of it than many other tenants. I'm comfortable with a 25-30% discount for relatives not violating the FMV rule.

Agreed, a discount wouldn't automatically throw this into personal use, but it does have to be reasonable and justifiable.

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One more thought on this:  Donor should provide detailed calculations of the basis gifted to sibling because the character of any future gain or loss on that gifted portion will be the same as if donor disposed of it. In other words, if that portion of ownership would be subject to ordinary tax rate in the hands of the donor, then the donee will not get cap gain rates on that portion either.

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20 hours ago, jklcpa said:

Donor should provide detailed calculations of the basis gifted to sibling because the character of any future gain or loss on that gifted portion will be the same as if donor disposed of it.

Judy I don't believe that applies in this case since the IRS reg's take a front loading approach to a partial gift/sale transaction (basis is first applied to the sale) versus the apportionment method.

In this case, since the basis in hands of transferee is less than transferor, then carry over of character rules should not apply.

I am sure that is spelled out and buried in the 1250 regs but don't have time now to look it up.

If on the other hand the IRS had adopted the apportionment method, the basis would be split between the sale and gift.  The gift portion would then retain the transferor's character.

 

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It is used as the "downpayment" and that is why the gift of equity many times is @ 20%. It's one way to allow the sale to occur earlier because the purchaser doesn't have to save up those funds in order to qualify for the mortgage, and it also allows the borrower/purchaser to avoid having to purchase mortgage insurance.

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