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Capital Gains and Gift of Equity

I know this has been discussed but all the situations I read are all a little different, so U just wanted to ask.  We are purchasing my parents second home. Payoff is around 155 to them, its valued in the mid 200's. We wanted to use the gift of equity and purchase it for 185 from them to cover down payment without going over the 30k gift limit. My parents purchased it for 165. Will they need to pay Capital Gains on the 20k difference? Or does it just count as the gift because they're not actually making that money? Any feedback would be appreciated. 

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Level 15

Capital Gains and Gift of Equity

The gift and capital gains that will be (potentially) incurred are two separate issues.

 

With respect to the capital gains, your parents' gain will be the difference between the selling price (i.e., what you are paying them for the property) and their basis (i.e., what they paid for the property plus any improvements they may have made).

 

Regarding the gift, the amount of the gift would be the difference between the fair market value of the property and what you are paying for the property (the mortgage is not considered unless you are assuming the mortgage or you are taking the property subject to the mortgage).

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Level 15

Capital Gains and Gift of Equity

The gift and capital gains that will be (potentially) incurred are two separate issues.

 

With respect to the capital gains, your parents' gain will be the difference between the selling price (i.e., what you are paying them for the property) and their basis (i.e., what they paid for the property plus any improvements they may have made).

 

Regarding the gift, the amount of the gift would be the difference between the fair market value of the property and what you are paying for the property (the mortgage is not considered unless you are assuming the mortgage or you are taking the property subject to the mortgage).

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Level 15

Capital Gains and Gift of Equity

Don’t be controlled by the gift tax rules.  Going over $15,000 per person would only mean that your parents have to file a report.  Gift tax is not actually owed unless their lifetime total of gifts and estate is more than $11million.  

And the limit for reporting a gift is $15,000 per person both ways, so if you are married and your parents are both alive, they can gift you $60,000 without requiring a gift tax return ($15,000 each from Dad to you and your spouse and $15,000 each from your mom to you and your spouse.)

 

The gift of equity will also affect your cost basis for determine future capital gains, so keep your documentation of the sale and gift for as long as you own the home plus 6 years after you sell.  

*Answers are correct to the best of my ability but do not constitute legal or tax advice.*
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