Parent's tax liability for selling 2nd home to child? Capital gains? Gift of equity is involved.

[dpcsmc]

My mother owns a second (vacation) home. It's never been her primary residence. I want to buy it from her. She bought it 6 years ago for $123k. The appraised value is $220k. She owes $86k. She want to sell it to me (her son) for the loan value and the rest is a gift of equity. How can we minimize or eliminate her tax liability? I don't know if this helps, but she collects payment on a permanent disability and produces no other income. 

[Critter]

She has no gain to report ... bought for $123K & sell for $86K so that is a non deductible loss on a personal use asset.   What she does need to file is a gift tax return for the amount of the gift she gave you in equity... the TT program doesn't handle the gift tax forms.

[dpcsmc]

thank you for the clarification!

[Hal_Al · Accepted solution]

I concur with Critter#2, your mother has no capital gain to report for income tax purposes. She does not even have to include the sale on her income tax return, if she normally even files a return. 

Her gift of equity to you is $134,000 ($220,000 - $86,000) and that is the amount that needs to be reported on the gift tax return. "Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption. See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/...

Your cost basis, in the property, for when you sell it in the future, is NOT the $220,000 it was worth, at the time of the gift. It is also not the $86,000 you paid.  Your cost basis is $123,000. The rule, for a gift, is that the recipient's basis is the giver's basis. 

[dpcsmc]

Also, thank you as well for the clarification!

[Critter]

If she gets a form 1099-S from the closing company ( it's usually buried  in the pile of docs you go home with ... ask the title company for the form)  then she must report the sale on a return even if she has a non deductible loss.

[leapy88]

Hi Critter#2... I'm in a similar situation as dpcsmc... Follow-up question on the 1099-S from the closing company. What amount will be on the 1099-S? In this scenario will it be the $86k or the FMV of $220k?

[TaxGuyBill]

The 1099-S will usually show the 'full' price ($220,000). So to report the sale, you need to either artificially increase the Basis or Selling Expenses so it will report the proper gain/loss.

[leapy88]

Hi TaxGuyBill, thank you.  I had posted a question to Hal_Al

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3163654-can-we-use-the-gift-of-equity-to-minimize-the-impact-of-th...>

Now after reaching out to the Title Company agent and showed her the Exemption for the 1099-S instruction #3 that gifts are exempt from reporting on a 1099-S.. She is telling me that they will put what ever we want to be represented on the Sale of the property. Would it be correct if they put down the actual Realized Amount?  I've read some threads on here, which you have commented on and that when the 1099-S is posted as FMV and not the actual amount realized it becomes flag by the IRS for the discrepancy.  Thank you.

[TaxGuyBill]

In most cases, the 'full' price is shown because that the mortgage company of the buyer needs to look at to determine if the mortgage is 80% or less of the FMV.  In your case,that doesn't really apply, so they likely will show the actual amount it sold for (the amount of your mortgage).

[leapy88]

TaxGuyBill - Is this process of Bargain Sale/Gift of Equity so complicated to process that I would need a CPA/Tax Lawyer to process? or is it just the fact of completing the 709 form?

Would like to see if the original poster Dpcsmc can share his/her experience.

[dpcsmc]

I would like to say I've proceeded with the transaction, but I have not... yet. We are not in a huge hurry to exchange ownership, but it will happen at the end of this year. My question was asked so can prepare myself for the inevitable.

[Critter]

Seek local assistance to set up the sale properly ... a real estate & tax attorney would be wise.