Discussion:Consumer Questions - Gift of Equity (house sale)

Your help is greatly appreciated

I wish to have a nickel every time I see the comment “See a professional”. Just give the guy an answer if you know it. He might be smarter and more knowledgeable than a professional accountant he is using. That was happened to me many times in my life. Every time I asked for a professional help, I found myself in a very tricky situation: paid- a lot, got- a little, having no clue what I paid for.

However I’m not sure that it works the same in real-estate property as you described. And I have a reason for this. I owe a couple of houses in FL, and I can’t sell them (the market is down). The FMV is $300K, but I have to pay off a construction loan, so I sell one of them for $250K (to a friend of mine). Is there any gift tax involve here? I don’t think so. So how do we (professionals) determine when the rule about gift tax starts working?

If the FMV of the home is $300K and you sell it for $250K, there is a potential that a gift was made. A lot of it has to do with your intent. Do you intend to make a gift of the $50K? If so, it's subject to gift tax. If it's a distressed sale, then no gift.

By the way, sometimes the best advice you can give is to seek professional assistance. It's possibe to structure Rhett's transaction in such a way to eliminate gift taxes, but it requires professional assistance and an understanding by all parties. Might as well get the professional involved up front so the professional can make sure it's done correctly.

So if you want to give out the same bad advice based on incomplete information you are complaining about others giving you, that is your choice. Not mine.

Regarding myself I can comment that I have to take some of it back. Now always but often I’ve been in a situation that I described. And of course there are people who were willing to help me out. I agree with you 100%. You can’t give an advice, based on 2 sentences. However, you can give a hint, or ask some additional questions that could lead to a correct decision, and after visiting this chat the person could have an intelligent conversation with his accountant. I personally found myself in the same situation many times. I ask a question, and receive a reply: ask a professional. I know that I have to ask a professional, that’s why I’m here. There are a lot of professionals on this chat, so I’m asking you. If I already have guts to show to the whole world that I don’t know something, and embarrass myself to the tip of my toes, please give me some credit… give me some help other then: ask professional. I might be wrong, but this is my view point, as a starter and as a professional. And please don't take it personally, I didn't mean to be rude.

Finally, if the Mother's basis is $70,000, does the daughter start with a basis of $55,000 or $70,000? Dennis's answer above sounds like the daughter's basis is $70,000. If the mother only receives $45,000 then it seems that there would not be a gain on Schedule D??

I have got a question about the gift of equity: I'm buying a house from my sister in law and I asked for the mortgage to be higher than the [price of the house; however, my sister in law doesn't want to pay taxes and we want to do a gift of equity. The difference is arround $19000. How should we do this does anybody have any ideea?

Is there a way we could write the mortgage to satisfy this requirement? What are the penalties for paying the uncle more gain even though he was taxed on an amount larger than he actually will receive?

Of course you may never have had basis in the 85K of gift equity anyway. It will depend on what Uncle did on his tax return.

The Gift of Equity Letter right now is based on the appraisal value of the house which is 485k. We are putting 12k down on top of the equity gift. This would equal a 20% down payment so we would have to pay points, mortgage insurance, and PMI. If we didn't write the mortgage up this way the best rate we could get would be 7.25 fixed. This loan would be for 6.625 and our payment would be $400 a month lower.

I am waiting to hear back from a lawyer on this. But the tax implications are on the table. Good to know about the 12k vs 10k that makes things a little easier. Thank you.

The transaction is split into two parts: part gift (85K) and part sale (400K). However, if there is intent to reimburse the uncle for a portion of the gift (50K) then technically it's not a gift. This is an ethical question, one where I express no opinion either way. However, your attorney cannot be a party to this repayment scheme since it would constitute mortgage fraud. Tread carefully.

Whether you uncle pays tax or not (as mentioned above by Dennis) depends on his basis. His basis in the property (if it was inherited) is the fair market value at the time the owner deceased. Assuming his basis is below 400K:

The gift portion is split up as so: 12K gift from Uncle > you 12K gift from Uncle > wife 24K gift exempted per year. If your uncle was married, that would be another 24K exempted. Assuming he is not since you did not mention it:

85K - 24K exemption = 61K gift that will eat away at his $1million lifetime allowance. Assuming this 61K credit does not put him over $1 million in lifetime gifts so far, no tax owed at this time. However, I do believe it does reduce the amount his estate can give away ($1.5million allowance). A gift tax return would need to be prepared (Form 709), however usually no tax is actually owed.

According to [Reg 1.1001-1] e, your uncle only recognizes the actual compensation received. Since he never receives the 85K that he is gifting right back to you, it would not be subject to gains. However, were the IRS to prove that the gift was a loan, he would need to recognize the imputed interest on the loan AND the capital gains on the fraudulent "gift" / loan amount. Again, I give my worthless opinion and no recommendations either way. Keep in mind, any checks at or above $10,000 must get reported to the IRS by the bank.

Treasury regulation Reg. 1.1001-1

(e) Transfers in part a sale and in part a gift

(1) 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. However, no loss is sustained on such a transfer if the amount realized is less than the adjusted basis. For determination of basis of the property in the hands of the transferee, see §1.1015-4. For the allocation of the adjusted basis of property in the case of a bargain sale to a charitable organization, see §1.1011-2.

So, take the 400,000 and subtract the adjusted basis in property and you have gain. The character of the gain I'm fuzzy on, but it appears as that aspect of the situation is both unavoidable and out of scope. If he lived in the house for 2 out of the last 5 years, the gain would be exempt up to 250K (500K if married).

I hope this helps. Same disclosures, do your homework, professional help .... yadda. The above is the product of my research and a week of headaches.

Can you clarify - did the uncle inherit the house outright from the grandmother, or is it currently owned by her estate? What do the references to "the estate" mean?

and checks of 10,000 don't get reported to the IRS, you are thinking of CASH transactions

Let's say that it IS worth only 400k. NOW where will the buyers come up with the 20% down payment money?

And, now that I go back and reread everything, that's what I still think. What am I missing?