Capital gains with gift of equity?

[theblackpearl]

I bought a house for family to live in and have been using it as a “rental” to them. They are now financially able to buy the house from me and I was planning to sell it to them at original purchase price, so not really any capital gains. 

However, their lender said I can provide them a gift of equity so they can take a loan out based off the higher appraised value now instead of the original purchase price a few years ago. I believe I need to raise the purchase price to provide this. My understanding is that it won’t trigger gift tax because it is under $30k ($15 for each individual). But will this now trigger capital gains tax?

[Mike9241]

see a lawyer so what you want to do can be properly documented to avoid the pitfall of the IRS saying you sold it to them for FMV (resulting in capital gain and related tax for you) and then you gifted them the proceeds.    

[Critter-3]

I would be suspicious of a lender that is bumping up the loan amount  if there is no valid reason for doing so... sounds like they could be bumping up their commission.  There is no rule that the buyer must pay full market value ... the  fact that you are selling below market is even more attractive to a bank since there is less risk if the buyer defaults on the loan. 

What they are proposing is that your family leaves the closing table with a hefty amount of money  and incurring a larger mortgage payment to boot.  Is that really the goal that your family pays interest for years on your generosity ? 

Or does the family need to borrow more to cover closing costs?   If so they don't need to up the price by 30K to do that. 

I agree that you need to talk to someone else before going thru with this transaction.

[AmeliesUncle]

No, it won't affect your capital gains.  The sale price is still the actual amount you received, not the inflated amount on the sales sheet which is pretty much only for loan purposes.