House Equity Gift

[Tracy Lee]

TP sold home he bought 11-2021 specifically for girlfriends son to enable to have a home of his own for $325,000.00  (nice guy!) Then sold it to him 5-2023 for $376,000.00 and gifted him $45,120.00 in equity to help with the 20% down (the son had saved the rest of the down payment).  After proceeds, cost, improvements and sellers fees.... he has a gain of $44,886.00 even though he never actually got any money from the buyer other than the amount he purchased it for.  He wants to be able to add the $45,120.00 to his sellers expenses, which I know he can't but sadly he is going to owe IRS $12,000+ and Oregon $5000. + in taxes because it made most of his social security income taxable.  This is a phone call I am dreading!  He does not see this coming! He should have consulted me (or another CPA) before he sold, perhaps we could have advised him to sell the house at a loss to offset the gain of the gift.  Any advise or thoughts or even a work around on this gain I am unaware of?

[Yardley CPA]

Sounds like a tough phone call to make but one I would have no problem with.  Shouldn't he have known his actions would result in a somewhat hefty tax bill?  I guess it's easy for me to sit back and ask why clients don't consult an advisor before making a transaction like this?  With that said, I would simply let him know exactly what you provided in the post, what he owes and it's unfortunate there was no opportunity to plan for the sale beforehand.  He should understand exactly what that means...he should have contacted you.  Good luck. 

[DANRVAN]

10 hours ago, Tracy Lee said:

. he has a gain of $44,886.00 even though he never actually got any money from the buyer other than the amount he purchased it for.  He wants to be able to add the $45,120.

If your are saying the amount realized = basis; then gain = zero.

He can't be taxed on consideration he never received.

[michaelmars]

he did receive it and then gifted it back.

[DANRVAN]

39 minutes ago, michaelmars said:

he did receive it and then gifted it back.

 

11 hours ago, DANRVAN said:

never actually got any money from the buyer other than the amount he purchased it for.

Amount realized = amount received.

Per 1.1001.1 (e)

"Where a transfer of property is in part a sale and in part a gift, the transferor has a gain to the extent that the amount realized by him exceeds his adjusted basis in the property."

OP implied that amount received = basis.

Substance over form.

 

[DANRVAN]

And on the other side of the transaction, since amount paid by buyer = seller's basis, then buyer's basis = same, per § 1.1015-4 as partial purchase / partial gift.