Gift of Equity

[DJS999]

I purchased a property in 2020 to hold the mortgage for my son until he could obtain a mortgage. After 23.5 months (May 2023) he was able to get a mortgage. The purchase price I paid was $305,000. I was planning to sell it to him for $305,000, but to avoid PMI he asked (at the suggestion of the mortgage broker) for the price to be set at $404,000 and give him a gift of equity.  So I agreed, and gave him a $90,000 gift of equity and then also a $9000 credit at closing. So he paid $305,000 ($404,000 - $90,000 - $9000) for the property.  With the closing costs that I paid, I came out with a loss. However, the 1099S indicates the proceeds were $404,000.  Can the gift of equity and the closing credit be used to reduce my capital gains to zero or even partially?

[Mike9241]

yes they can but the issue is reporting because the 1099 reflects $404. you'll end up with no taxable gain nor a loss.

you report sales price as $404 selling expenses as $9 cost as $305 and an adjustment of $90 using code O.

you also need to file a gift tax return.

your son's basis is

§ 1.1015-4 Transfers in part a gift and in part a sale.
(a) General rule. Where a transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of—

(1) Whichever of the following is the greater:

(i) The amount paid by the transferee for the property, or

(ii) The transferor's adjusted basis for the property at the time of the transfer, and

(2) The amount of increase, if any, in basis authorized by section 1015(d) for gift tax paid 

Example 1.
If A transfers property to his son for $30,000, and such property at the time of the transfer has an adjusted basis of $30,000 in A's hands (and a fair market value of $60,000), the unadjusted basis of the property in the hands of the son is $30,000.

[DJS999]

Thank you for your help!