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.

[curiousminds]

---

@Anonymous_ wrote:

As a final thought, I really do not understand exactly what you do not, apparently, comprehend about the applicable treasury regulation as it is rather clear cut.

Read Section 1.1001-1(e); you are the transferor and Example 1 appears to be precisely on point.

See https://www.law.cornell.edu/cfr/text/26/1.1001-1

---

Well first you need to understand that there isn't a single CPA on the planet that would agree with you, and if there is I would love to meet them so I could put this whole thing in the rearview. Then you need to ask yourself why that might be, try to prove yourself wrong maybe? I've already been on both sides, I'm not sure how objective you've tried to be here.

Example 1 is almost on point except in my case the house is being sold at fair market value, which is 200k according to Quicken. 30k is being gifted except that it just becomes the downpayment on 200k. Do you see the difference?

[Anonymous_]

---

@curiousminds wrote:
Well first you need to understand that there isn't a single CPA on the planet that would agree with you

A) You do not know all of the CPAs on the planet, and

B) Most CPAs are not tax specialists (an unnerving percentage have scant tax knowledge).

[curiousminds]

You may be right, but that doesn’t change the practical reality of my situation here.

[Anonymous_]

---

@curiousminds wrote:

You may be right, but that doesn’t change the practical reality of my situation here.

---

Which is spelled out in Treasury Regulation §1.1001-1(e) (pointed out to you numerous times) with your amount realized being defined in I.R.C. §1001(b).

[TomD8]

@curiousminds wrote:  "30k is being gifted except that it just becomes the down payment on 200k."

Except that's not what's happening.  Seller is not giving $30K cash to the buyer; instead seller is letting buyer buy his home at a $30K discount from FMV.  The IRS treats that $30K discount as a gift and requires a gift tax return if the amount exceeds the filing threshold..  

On the other hand if seller gives $30K cash to buyer - which in effect is @curiousminds 's scenario - and buyer then turns around and uses the $30K to buy seller's house at full FMV, where is the gift?  Seller has given away $30K, but has gotten the $30K right back because buyer used the money to buy seller's house.  That is not a gift.

[curiousminds]

“Which is spelled out in Treasury Regulation §1.1001-1(e) (pointed out to you numerous times) with your amount realized being defined in I.R.C. §1001(b).”

No It is not spelled out because that isn’t what is being reported and I have no control over that.

[Anonymous_]

---

@curiousminds wrote:

No It is not spelled out because that isn’t what is being reported and I have no control over that.

---

It most certainly is spelled out, regardless of how it is being reported (which is erroneous in this instance). Merely because certain lenders, law firms, title companies, or even the IRS are handling this scenario in one, specific manner does not mean it is the correct one (read that Tax Court case again).

[curiousminds]

---

@TomD8 wrote:

@curiousminds wrote:  "30k is being gifted except that it just becomes the down payment on 200k."

Except that's not what's happening.  Seller is not giving $30K cash to the buyer; instead seller is letting buyer buy his home at a $30K discount from FMV.  The IRS treats that $30K discount as a gift and requires a gift tax return if the amount exceeds the filing threshold..  

On the other hand if seller gives $30K cash to buyer - which in effect is @curiousminds 's scenario - and buyer then turns around and uses the $30K to buy seller's house at full FMV, where is the gift?  Seller has given away $30K, but has gotten the $30K right back because buyer used the money to buy seller's house.  That is not a gift.

---

Hmm not exactly. The seller could have had anyone buy his house at FMV without giving them $30K, so how do you not see the gift, just because the buyer chose to use it to buy something the seller had?  

[fanfare]

FMV is whatever the buyer and seller agree.

There are many reasons the seller may want to get out fast.  The seller is not making a gift.

I personally would certainly not file a gift tax report even though I don't have an 11 million dollar estate.

[curiousminds]

I think that is only true in arms-length transactions. In non arms length transactions (my case) you can’t rely on buyer and seller to come up with a FMV, because it is essentially off the market at that point.

[Anonymous_]

@curiousminds Chew on this hypothetical and see if it makes any sense to you.

Here is a modification of your set of facts:

You paid $150,000,000 for your house.

The house appraised at $200,000,000

You sold the house for $175,000,000

Gift of equity was $25,000,000

Now, according to you, as well as your law firm (closing agent or whomever), you have a $25,000,000 capital gain on which you will be taxed. Further, you will also have made a $25,000,000 gift on which you will owe gift tax (at the top marginal rate of 40%). 

[curiousminds]

When you say I would owe gift tax are you saying that is what the rate would be if you had already blown through your lifetime deduction? 

[Anonymous_]

---

@curiousminds wrote:

When you say I would owe gift tax are you saying that is what the rate would be if you had already blown through your lifetime deduction? 

---

You would not owe gift tax until you had "blown through" the exemption and that was the top marginal rate. 

Regardless, does it make any sense whatsoever to you that a scenario exists where you would owe both capital gains tax and gift tax on the same transaction? 

[curiousminds]

I think more accurately said it wouldn’t make any sense to be paying two different taxes on the same amount of money perhaps. Then again whenever I buy anything (single transaction) I’m always paying multiple taxes, so I don’t know if that argument really holds water or not other than just sounding like a **bleep** deal.

[Anonymous_]

---

@curiousminds wrote:

.....whenever I buy anything (single transaction) I’m always paying multiple taxes....

---

In this instance, you are the seller, not the buyer, and we are discussing federal income and estate/gift taxes. 

You do not pay capital gains tax on gifts of cash or property.

If you give someone (anyone) $25,000 cash with the understanding that that person will, in short order (or at some specific time), purchase property you own for an additional $25,000 (that you gave that person), that is not a gift. If you did try and claim that was a gift to avoid tax (e.g., capital gains tax), that would be considered a step transaction and invalid as a gift.