Does 'gift of equity' create capital gain or add to cost basis to home we sold to our son? Home appraised for $187K. Gift of equity was $13K. Our cost basis was $174K.

[TomD8]

@Fred McGovern --

Since a gift of equity is tied to the sale of a single home, not sure how you would give two gifts of equity on the same property.

@vandana1955 --

Yes, a gift of equity reduces the buyer's cost basis in the home, potentially increasing the buyer's capital gain when they sell the property.

[tagteam]

A gift does not necessarily reduce the basis of the property received as a gift. 

See https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

[TomD8]

Property received entirely as a gift is not the same as property purchased with a gift of equity.  A gift of equity reduces the sale price of a home.

https://www.quickenloans.com/learn/gift-of-equity

[tagteam]

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@TomD8 wrote:

Property received entirely as a gift is not the same as property purchased with a gift of equity.  A gift of equity reduces the sale price of a home.

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I agree with the general proposition, of course, but the post by @Fred McGovern specifically referred to a reduction in basis, not the sales price.

[curiousminds]

Read the OP though because that is not what is happening. The 1099-S that the person received reflects the purchase price of the new owner, not the amount that the seller sold for. In these types of deals the home is still being purchased for the appraised value, but the difference between the appraised value and what the discounted sale the seller is willing to sell for, becomes the gift of equity amount, which becomes the buyer’s down payment. What everyone is trying to figure out is, does the seller HAVE to pay capital gains on the entire difference between their purchase price of the property, and the purchase price of the new owners, or can they deduct their gift of equity from that amount of capital gains somehow? And if so, what is the proper way of doing it? Do they just add their gift of equity to their cost basis?

[AmeliesUncle]

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@curiousminds wrote:

Read the OP though because that is not what is happening. The 1099-S that the person received reflects the purchase price of the new owner, not the amount that the seller sold for. In these types of deals the home is still being purchased for the appraised value, but the difference between the appraised value and what the discounted sale the seller is willing to sell for, becomes the gift of equity amount, which becomes the buyer’s down payment. What everyone is trying to figure out is, does the seller HAVE to pay capital gains on the entire difference between their purchase price of the property, and the purchase price of the new owners, or can they deduct their gift of equity from that amount of capital gains somehow? And if so, what is the proper way of doing it? Do they just add their gift of equity to their cost basis?

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Did you read through the first two answers?  That is what you need to know.

[curiousminds]

Okay but it feels like there isn’t strong consensus here.

[tagteam]

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@curiousminds wrote:

Okay but it feels like there isn’t strong consensus here.

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Yes, as @AmeliesUncle posted, read the first answers to the OP's question.

Also, read the Code and Regs:

See https://www.law.cornell.edu/cfr/text/26/1.1015-4 (for the transferee)

See https://www.law.cornell.edu/cfr/text/26/1.1001-1#e (for the transferor)

[curiousminds]

So if I am understanding this right, this kind of transaction where there is a sale as well as a gift of equity, the gift of equity increases the costs basis of the seller, and decreases the cost basis of the buyer, even though the buyer has an appraised value purchase price on the property.

[tagteam]

The gift has no impact on the adjusted basis of the seller. Gain is calculated by the extent the amount realized (less selling expenses) exceeds the seller's adjusted basis.

See Treas. Reg. § 1.1001-1(e)(1)

The buyer's unadjusted basis is the greater of the amount paid or the transferor's adjusted basis increased by any gift tax paid (for determining a loss, the buyer's basis cannot be greater than the fair market value at the time of the transfer).

See Treas. Reg. § 1.1015-4(a)

[curiousminds]

Yes I read those regs but obviously understanding and interpreting them is my problem and everyone else’s. For example, is “amount paid” the same as purchase price?

If the gift cannot be used to adjust the buyer’s costs basis (btw earlier on in this thread, like the 2 first responses you referenced, people said this is what you do, which is more evidence of the lack of consensus here) then what is adjusted so the seller isn’t paying for capital gains on their gift of equity? We all agree that a seller should not be paying capital gains tax on their gift of equity correct? Does it go into selling costs?

[tagteam]

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@curiousminds wrote:

We all agree that a seller should not be paying capital gains tax on their gift of equity correct? 

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Yes.

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@curiousminds wrote:

Does it go into selling costs?

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No. From the perspective of the transferor (donor) the amount of the gift is disregarded. A gift tax return (Form 709) is required to be filed if the annual exclusion is exceeded.

[tagteam]

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@curiousminds wrote:

If the gift cannot be used to adjust the buyer’s costs basis (btw earlier on in this thread, like the 2 first responses you referenced, people said this is what you do, which is more evidence of the lack of consensus here)......

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The Reg I cited has that embedded in it.

For part sale, part gift (of (property), there is a split basis. The amount the buyer (transferee) paid is "part sale" and becomes part of the cost basis while gain/loss on the part that is a gift is calculated differently depending upon whether there is a gain or a loss.

See https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

[as a side note, @TaxGuyBill is an enrolled agent and has years and years of experience in income tax preparation]

[curiousminds]

If you don’t adjust the cost basis, and you don’t add the gift into your selling costs then how do you offset the capital gains the IRS will see when purchase price isn’t offset by the gift of equity either?

[curiousminds]

I agree it sounds like the regs are in understanding of our position but the regs don’t tell you how to properly file your taxes so that the seller doesn’t end up paying capital gains on the gains in addition to their gift of equity. You told me to see the first posts for answers to my question, you’re telling me that TaxGuyBill knows what he’s talking about but you’re not acknowledging all of these people are saying that the seller should adjust their cost basis or include the gift of equity into their selling costs to accurately reflect what gains the seller actually received, in fact it sounds like you are saying explicitly, that is not what you do. And for that reason you are giving very confusing advice.