That example still doesn’t make sense. You are forgetting that in that hypothetical it was already established that 200k was FMV. Just because the guy he gave 25k to, used it to partially fund the purchase of his house, doesn’t mean the seller gets that money back and is making a round trip as you said. The seller is ultimately still only getting $175k for his 200k house if you subtract his gift. Since 200k is fair market value he could have sold it to anyone for 200k.
In my opinion what the real difference between being gifted cash, vs what I did, is if it was cash the recipient could have done anything he wanted with it. In my case it only means something to the recipient if they purchase the house.
“1099-S should report proceeds at $175K, because $175K is all seller received“
That isn’t how we do things though, they report on gross proceeds, and the purchase price is always gross proceeds.
