Real Estate / Capital Gains / Gift Tax Question - SeaPA

[smhnole]

Does a Gift of Equity lesson Capital Gains?

Person A owns rental property which was appraised at $300K and wishes to sell to a relative, Person B. Person A's cost basis is $100K. The on paper sales price will be $300K and a gift of equity in the amount of $100K will be given to Person B in order to avoid PMI.

Would Person A only have to pay capital gains on the $100K realized gains or the $200K on paper gains?

 

[funksouljon]

Taxes are for chumps.

 

[cfbfan23]

I'm curious, would there also be a tax on the gift portion?

 

[smhnole]

I'm curious, would there also be a tax on the gift portion?

Not any type of advice here, but no, neither Person A or Person B, would be taxed on the gift. Since the gift of equity is over the annual limit, Person A will have to complete Form 709, but no tax will be due from Person A as long as Person A is under the lifetime minimum of $5MM and whatever change it currently is.

Or something like that.

 

[OrlandNole]

More of us are interested to know if Shane is Person A or B than the answer to his question.

 

[SeaPA]

It's a gray area, and in the past I've not found anything concrete on how to handle that situation. One argument is that the seller only got $200k, and that's the amount on which his gain would be based (so only paying tax on the $100k gain). The other is that he got $300k, so has a gain of $200k; then he chose to give away $100k; the gift is not a deductible item, so he gets hit with the higher tax.
I've typically taken position #1, reporting in a way that only shows $100k as taxable. Not sure if I'd win the argument in an audit - I've never had it come up in one.
As to the gift tax, you've what you've described is roughly correct. The gift tax form should be filed, but unless the seller's estate is large it won't matter.

 

[SoddyNole]

The mortgage is for 200K right? Seems to me you are simply selling the house below market value and would only be responsible for the 100K in gains.

 

[smhnole]

Thanks, SeaPA. This is being done with little advanced notice so the buyer is not prepared for the 20% down requirement. This was looked at as an alternative, but the potential tax liability may outweigh one year of PMI for the buyer.

The mortgage is for 200K right? Seems to me you are simply selling the house below market value and would only be responsible for the 100K.

Correct, but the purchase price is being listed at 300K to avoid buyer having to pay PMI. Since PMI is based on the lesser of the purchase price or appraised value, PMI will have to be paid for at least the first 12 months.

 

[Fijimn]

Sounds like you need a set of 39 weight ball bearings and some 3-N-1 oil

 

[SoddyNole]

Sounds like you need a set of 39 weight ball bearings and some 3-N-1 oil

It's all ball bearings nowadays.

 

[Gonolz]

Thanks, SeaPA. This is being done with little advanced notice so the buyer is not prepared for the 20% down requirement. This was looked at as an alternative, but the potential tax liability may outweigh one year of PMI for the buyer.


Correct, but the purchase price is being listed at 300K to avoid buyer having to pay PMI. Since PMI is based on the lesser of the purchase price or appraised value, PMI will have to be paid for at least the first 12 months.

If the purchase price in the documents is $300k, beware that the title company will probably issue a 1099-S to the seller and file with the IRS using $300k as the proceeds.

If the argument of a gift does hold up in audit, I think that it is more complicated than only tax on $100k gain. The gift of $100k would be of the property (if you argue cash gift then it tanks the argument that the proceeds are only $200k). B would take a carryover basis on the 1/3 property ($33k), A would be treated as selling for $200k with the remaining basis of $67k for a $133k gain. B would end up with $233k basis

 

[SeaPA]

If the purchase price in the documents is $300k, beware that the title company will probably issue a 1099-S to the seller and file with the IRS using $300k as the proceeds.

If the argument of a gift does hold up in audit, I think that it is more complicated than only tax on $100k gain. The gift of $100k would be of the property (if you argue cash gift then it tanks the argument that the proceeds are only $200k). B would take a carryover basis on the 1/3 property ($33k), A would be treated as selling for $200k with the remaining basis of $67k for a $133k gain. B would end up with $233k basis

You sound like a tax geek (but I agree with what you wrote)

 

[smhnole]

If the purchase price in the documents is $300k, beware that the title company will probably issue a 1099-S to the seller and file with the IRS using $300k as the proceeds.

If the argument of a gift does hold up in audit, I think that it is more complicated than only tax on $100k gain. The gift of $100k would be of the property (if you argue cash gift then it tanks the argument that the proceeds are only $200k). B would take a carryover basis on the 1/3 property ($33k), A would be treated as selling for $200k with the remaining basis of $67k for a $133k gain. B would end up with $233k basis

The title company has confirmed that the 1099-S will state the sales contract price so we are aware of this.

This will be the primary residence for B and they understand the additional basis would be shifted to them from A, but that is good thinking. Might talk to you offline.

 

[West Duval Nole]

OK so to get around this couldn't instead of saying you gifted them 100k, by saying you loaned them 100k with payments of 10k a year for 10 years. Then say you gifted them each year the 10k in loan payments (I believe the amount you can gift is 14k or so with no tax penalty, so you might be able to shorten it by gifting that amount for 7 years and then whatever the remaining balance is the 8th year).

 

[SeaPA]

OK so to get around this couldn't instead of saying you gifted them 100k, by saying you loaned them 100k with payments of 10k a year for 10 years. Then say you gifted them each year the 10k in loan payments (I believe the amount you can gift is 14k or so with no tax penalty, so you might be able to shorten it by gifting that amount for 7 years and then whatever the remaining balance is the 8th year).

From a tax standpoint that would work, but the lender would a!most certainly reject it because it is additional debt for the purchaser/borrower -which would blow up the loan.

 

[RunRonnieRun]

You sound like a tax geek (but I agree with what you wrote)

Dude worked for H&R Block doing returns for like two years. Tax geek is an understatement!

 

[seminole97]

If the purchase price in the documents is $300k, beware that the title company will probably issue a 1099-S to the seller and file with the IRS using $300k as the proceeds.

If the argument of a gift does hold up in audit, I think that it is more complicated than only tax on $100k gain. The gift of $100k would be of the property (if you argue cash gift then it tanks the argument that the proceeds are only $200k). B would take a carryover basis on the 1/3 property ($33k), A would be treated as selling for $200k with the remaining basis of $67k for a $133k gain. B would end up with $233k basis

"I just wanted to speak to you about something from the Internal Revenue Code. It is the last sentence of section 509A of the code and it reads: 'For purposes of paragraph 3, an organization described in paragraph 2 shall be deemed to include an organization described in section 501C-4, 5, or 6, which would be described in paragraph 2 if it were an organization described in section 501C-3.'

And that's just one sentence out of those fifty-seven feet of books." -Ronald Reagan