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BCC0217
Returning Member

Capital Gains and Gift of Equity

I've looked this up but other scenarios appear a bit more complex than ours.

 

I bought a home from family member structured as follows:

  • "Sale" price of $700k which was closer to appraised value

  • $250k Gift of Equity from family member to me, which was used to cover down payment

  • Amount that seller received was $450k (our actual agreed upon sale price)

Now seller is working on determining capital gains due from the sale, and the accountant is stating that the $700k is the starting point, i.e. $700k less initial purchase amount, improvements, etc..

 

I believe that the amount used should be the money actually received by the seller. the 1099-S will show $700k but from what I'm understanding in my research, the seller will be able to record gains differently due to transfers in part a gift and in part a sale. The most relevant example I've been able to find is Fiscalini vs.Comm'r (Fiscalini v. Comm'r, T.C. Memo. 2017-163.) where the seller eventually seems to have won in court by stating that the actual money received is the starting point rather than the market value sale price (and the difference was gift of equity).

 

CPA is unaware of any other way than to pay taxes based on $700k - cost basis.

 

@Hal_Al Seems to the person most frequently commenting on this topic.

2 Replies

Capital Gains and Gift of Equity

CPA is correct since your return must reflect the same amount of sale that is on the 1099-S  to avoid IRS audit letters in the future.    Now the gift of equity adjusts the basis in the home so you only pay tax on the actual profit not the full purchase price.  

BCC0217
Returning Member

Capital Gains and Gift of Equity

Thanks for the reply. The CPA actually got back to us last night after reading the links we sent. In the end, they said did more research and now agreed that we can deduct the gift of equity from gains (or add to basis as you’ve put it). 

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