I bought a house for my parents and am selling to them at a loss.

[derichter1224]

Hello! I bought a house 2 years ago for my parents and they pay me each month to cover the mortgage/taxes/insurance. It falls well under what they can "gift" to me and I am not making any money on it so I have never messed with it as far as taxes are concerned. I put a sizable down payment on it so that their expenses would stay low. My desire is to sell it to them for what's left on the mortgage so that they can begin to build their own equity, as they have next to nothing for retirement. That means selling it at a significant loss to me. Can that loss be used to offset capital gains on my taxes?

[Carl]

Losses on the sale of personal property are not deductible. Period. In fact, you don't even have to report the sale on your tax return if sold at a loss. There is one exception through. If you receive a 1099-S then you are required to report the sale on your tax return, weather sold at a loss or a gain.

[derichter1224]

Would converting it to a rental make any difference?

[AmeliesUncle]

Not really.

To claim a loss on a rental, you use the LOWER of (a) your cost or (b) the Fair Market Value when it was converted to a rental.  So unless the value of the home decreases AFTER you convert it to a rental, there would not be a loss.

[Anonymous]

even a rental conversion would cause issues in that you would be renting at less than FMV to a related party.  so you would still probably end up with a loss on sale that's not deductible.  

even more if you are selling at less than FMV you're making a gift to them they should be reported on a gift tax return. 

[derichter1224]

I'm selling it to them at about $35000 under market value.

[derichter1224]

Thanks!

[AmeliesUncle]

But you can't claim a loss to a relative when you sell below Market Value.  You need to sell it AT (or above) Market Value, AND that Market Value needed to have decreased after it was converted to a rental.

As a side note, selling it below Market Value may require you to file a Gift Tax return.

Edit: @Anonymous   beat me to it.   🙂

[derichter1224]

I really appreciate it! This stuff is crazy confusing, I just want to help out my mom! So, forget about the loss, not important to me. I think I understand but just want clarification. If the house appraises for 110,000 and I sell it to them for what I owe, $65,000, the $45,000 difference would be tax free for them because my wife and I can each gift each of them up to $14,000 in a tax year. So, the 45,000 would fall under the gift threshold, correct. The only other consideration I see is that capital gains when they sell would be based on 65,000 selling price. However, in that market, they will never approach the top end of the capital gain threshold so it should be a non-issue. If all this is correct, the only other question I have is this: will the IRS come after me for trying to get around capital gains by selling at a loss?

[AmeliesUncle]

No, there is no problem with selling at at a loss.  But as you pointed out, the lower selling price may affect your parent's Basis.  But assuming they live and own the home for at least 2 years, if they sell it they are usually exempt from the first $500,000 of gain anyways.

A few clarifications about the Gift Tax:

• The annual exemption amount is now $15,000 per gift.;
• Yes, IF both you and your spouse own the property AND it is gifted to both of your parents, you may be able to avoid a Gift Tax return.   If only one of you is on the title or you only sell it to one parent, then it may depend on state laws.
• Gift Tax is assessed to the giver, not the receiver.
• Even if you go over the $15,000 annual amount, you won't actually owe Gift Tax unless your total Lifetime gifts are over $11,000,000+.   But you would need to file the return if you are over the $15,000 limit.