Pay Capital Gain or do Gift of Equity or general gift (cash)

[TomBrady1221]

Hello and thank you in advance for your assistance. 

I want to buy a house from my aunt. She is ok selling it to me for just what she owes. She doesn't want me to take over the mortgage because she already has a primary and wants to move to this state and buy another house. (because of DTI, she can't have three mortgages) She only owes $167k and the value could be above $280k. 

What I'm thinking is most likely the best thing to do is:

I buy it for $280k, $167k goes to payoff and that leaves let's say $110k

Through escrow, she could gift me back the $110k and also through escrow I could create my $56k (20%) down payment. 

So now I have a loan for $224 and she's clean, no gain, no loss. 

Is that $110k subject to tax (capital gains or gift...or both??)

Or should I just buy the house for less than it's worth and have her give me a gift of equity, rather than an actual gift of cash? So at closing, I'm buying for $167 (do I need 20% down in this case??) and then she gifts me $110k during the transaction (escrow, I guess?)

Or should she not give me any money through the transaction process what so ever and then just legally give me $14,000 per year and have it not get hit at all? (this involvs me buying @ full price again so she's going to get capital gains taxes in this scenario...so I doubt it's the answer...unless of course, it's possible she would get capital gains AND gift taxes otherwise)

What I'm guessing is that gifting the entire $110k to me will prevent her from the capital gain tax at all and then I can just give her 18% (is that the correct % for a gift of equity tax?) back via check so she can hold on to that in anticipation of having to pay it?

She has never "realized" any of this equity as the most she's even done was refinanced and took out like $10k back in 2018, when value was around $220k.

This is messy, I apologize. Any help is greatly appreciated.

[M-MTax]

Not sure this will help a lot but you should know the excluded amount for gifts is $15k per year....$14k was yesteryear. Then no gift taxes are paid on gifts until the life time exclusion is reached and that's over $11.5 million so your aunt will not have to pay gift tax on this deal. 

[TomBrady1221]

Thank you!!

I've never seen that $11.5M before but it didn't take much to verify what you are saying. 

So the $15,000 per year only applies to someone once they've gifted $11.5M in their lifetimes?

That must be what you mean because there's no point in mentioning $11.5M (or having it be the law) since it would take over 750 years to give enough (tax-free) $15Ks to get to $11.5M.

So if she does gift me all of the equity here, does that also circumvent Capital Gains tax?

Would I have a Capital Gains tax myself in this scenario?

[M-MTax · Accepted solution]

Nope....the $15k is the annual exclusion so you can give $15k to anyone and it doesn't count against your life time $11.5M. If she gifts you all the equity there is no cap gain until you sell and then none for her....only for you if you sell at a gain which you are sure to do.

[MinhT1]

The $11.5 million is a lifetime exclusion. Each year, gifts to each donee in excess of $15,000 would count towards that lifetime exclusion.

As the recipient of the gift, you do not have any tax to pay.

Capital gains tax only arises when you sell the house.