I purchased home from family with a gift of equity of $100K, the purchase was $600K, the loan was $500K; they paid 500K originally. How does that impact our tax return?

[chinkely]

My family will use this sale to pay me back on a $60K second loan on my current house.  How does this impact our tax returns if I will not see any of the $100K equity unless I see the house someday. 

[VolvoGirl]

Which house is your primary house?  You can deduct Mortgage Interest and Property Tax if you it itemize deductions.   You do not report gifts received on your tax return.  The giver sometimes needs to file a separate Gift Tax return but no taxes are due.  But I don't know about gifting equity.  

What are you doing with this home?  Are you going to rent out one of the homes?  Plus it's hard to understand what all is happening.  Who is doing what?  Why are they paying you back for a loan on your house?  Wouldn't you owe on the loan?

[chinkely]

Thank you for your help.  This will be my new primary residence closer to work and better schools for kids.  My concern was that my family would be stuck with paying taxes for gift of equity.

[Opus 17]

Your parents may need to file a gift tax return, but no tax will be owed.  Each person can gift while alive plus leave in an estate, a combined total of about $5 million tax free, over that there are estate taxes.  If a person gives more than $14,000 to one person in one year, then a gift tax return must be filed.  While no tax is owed unless the person has given away more than $5 million in their lifetime, the IRS uses the gift tax return to subtract the gifts from their lifetime limit.

A gift tax return does not have to be filed if the gift is less than $14,000 per person per year, and if you have a spouse and 2 kids, or three kids, then your parents could say that each parent (mom and dad) gave $14,000 of equity to each of 4 different people (you, spouse and children) so that even though the total gift was $100K, each individual gift was less than the $14,000 limit so no gift tax return is due.  I'm not sure whether "giving" equity to your kids is a good idea -- it's mostly a legal fiction, but it might have consequences, and I am not an attorney or accountant.  Unless your parents are planning to leave a $5 million plus estate when they die, it might be simpler to do the gift tax return.  Turbotax does not do this form, but its fairly simple, they can download and complete it themselves.  (If they ARE planning on leaving a $5 million plus estate, they should already have a tax planner, who can help them with reporting the gift.)

See here for more, <a rel="nofollow" target="_blank" href="https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-T...>

[Opus 17]

If you purchased a home, you can deduct certain closing costs in the year of the purchase.  You can also deduct mortgage interest and property taxes each year that you pay them.

The $100K from your family, whether it was a cash gift or a gift of equity, is not taxable to you at any point.

When you sell the house, your capital gain, if you have one, is the difference between the selling price and the purchase price.  The size of the loan does not matter.  If you sell for more than you paid, you have a gain.  If the home had been your personal residence at the time of the sale, the first $250,000 of gains is tax free, or $500,000 if you are married.  So you could potentially walk away with $1 million and not owe tax.  But that all happens when you sell.

[caitlin-digian]

How is this affected if the owner has a roommate?