@shelley1991 wrote:
I'm sorry Opus17. I understood your first reply post. My confusion and questions were actually about the part regarding the gift tax reply post? When I clicked the reply button, it didn't link to your response. Thank you.
If sorry that the gift issue is complicated, I probably shouldn't have mentioned it at all.
The usual situation most of the time is that you won't have to pay gift taxes on the gift.
As long as you don't pay gift taxes, the bottom line for your sister is that whatever your sister pays you in cash (or other financial consideration), is added to her basis. If she pays you less than fair market value for whatever reason, she only increases her basis by what she actually pays. (Or if she pays you more than market value, she increases her basis by what she actually pays you.)
If you do pay gift taxes, then your sister can include that in her cost basis as well. This is the complicated part,
First, is it a gift?
If you turn over your share for less than the fair market value, you may be considered to be giving her a gift of equity for the unpaid portion of the home. But this is tricky, because it can be hard to determine market value. Suppose you think the house will sell for $1M, so your half is worth $500K. But that's with a real estate agent, and ads and staging and it might take months to find a buyer in a slow market. If you agree to accept less so you can be done with it, that might not really be "selling for less than it's worth" when you include all those other factors, so it's not really a gift.
If it is a gift, is it taxable?
If we assume that you are giving part of your equity to your sister, you must report the gift on form 709. But you don't actually pay gift tax unless the total of all the gifts you have made in your lifetime is more than $12 million. That's why almost no one pays gift taxes even if they make large gifts.
How does gift tax affect basis?
We assume now that you are giving part of your house to your sister, and the gift is taxable. Suppose you pay $25,000 of gift tax. Your sister can increase her basis by the amount of gift tax you paid, even though she didn't pay that toward the house.
So going back, the actual situation is that you probably won't have a gift to report (for various reasons), and even if you did, you probably won't pay gift tax, so your sister's basis will increase by the amount of money or financial consideration she actually pays you for your share.
