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.

[Anonymous_]

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@curiousminds wrote:

Did you read the OP of this whole thing? I understand that 175,000 is what the parents are receiving, but that is not the same as the purchase price. 

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I was referring to the hypothetical posted by @TomD8. In that hypo, the parents are receiving $175,000 and the purchase price (Jack's cost basis) is also $175,000. The $200,000 is the fair market value which simply means the parents made a gift with a value of $25,000. 

[curiousminds]

I know you were. I don't think purchase price is always the same as cost basis however. In this case I believe the purchase price will be $200k, and the 1099-S from the lender will also show 200k, and the buyer's cost basis will be $175k. If there was no down payment amount from the buyer or if the buyer's down payment was entirely his own money, then yes, purchase price would be 175k, but that isn't how these transactions are done.

[Anonymous_]

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@curiousminds wrote:

...I believe the purchase price will be $200k, and the 1099-S from the lender will also show 200k...

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The 1099-S should show the gross proceeds as $175,000 (it is issued to the transferor).

If it shows $200,000, it is incorrect, which happens quite frequently.

[TomD8]

@Anonymous_ wrote:  "The 1099-S should show the gross proceeds as $175,000 (it is issued to the transferor)."

Correct.  The transaction is a sale + gift.  The 1099-S (if issued) should reflect the actual sale proceeds of $175000.  Depending on the amounts involved, parents may have to file a Form 709 Gift Tax Return.

[curiousminds]

It won’t though, I’ve read enough of people posting their experiences including this OP in this very thread, showing that what the 1099-S is going to show, will be the purchase price. 

I am in a situation where A. I don’t know how todo my own taxes. And B, 3 different CPA’s have all told me the same thing which is that I have to pay capital gains taxes on an investment property I sold to family with a gift of equity.

Details:

- I originally payed 150k for the house.

- House appraised at 200k when sold.

- My sell price was 175k.

- Gift of equity was 25k.

- Purchase price was 200k.

I’ve repeatedly been told now that I will have to pay capital gains taxes on 50k, and not the 25k I expected and still believe is correct. Why should I have to pay capital gains taxes on money I didn’t actually get? Not only that but everything I have read says that the gift of equity should lower the cost basis of the buyer, which makes me paying capital gains tax on the full 50k difference make even less sense.

How can I make these lazy and uninformed CPA’s see the light?  

[Hal_Al]

Q. How can I make these lazy and uninformed CPA’s see the light? 

A. You can't.  You just report the sale correctly on your tax return.

Q. I’ve repeatedly been told now that I will have to pay capital gains taxes on 50k, and not the 25k I expected. 

A. You've also been told, repeatedly, in this thread and others on the same subject that 25K is the correct amount of capital gain to report to report.  Doing so is straight forward if the 1099-S is for $175,000.

It gets a little tricky reporting a 1099-S for $200K, but is still a fairly common situation.  Report the sale amount as $200K. Either report cost basis as $175K (used by most people) or report the cost basis as $150K with a $25K adjustment in column (g) of form 8949.  TurboTax (TT) asks for "less common adjustments" in the interview.

You also have to file a gift tax return (separate from your income tax return) to report the $25K gift of equity.  A gift tax return is not required if the gift was to a married couple. It's considered 2 separate gifts of $12,500, which is below the $15K exclusion amount. 

"Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/....

[fanfare]

Since TurboTax does not provide any place to enter 1099-S, any amount reported on your tax return for this sale  will be the amounts you enter.

[curiousminds]

Why can’t I make them see the light??? I’m not going todo something that isn’t considered legal, and as I said I can’t do my own taxes especially for this year. 

Yes I’ve been repeatedly been told here that this is something I can do but it seems nobody really knows the truly correct and proper way of making the adjustment for some reasons, and not to offend any of you but all of you are just some people on the internet from my perspective, why would I trust you over a CPA? I need a source of authority on this. What if I call the IRS, would they tell me what todo?

[TomD8]

@curiousminds --

Per the IRS, Box 2 "Gross Proceeds" of a 1099-S is defined as follows:

"Gross proceeds means any cash received or to be received for the real property by or on behalf of the transferor, including the stated principal amount of a note payable to or for the benefit of the transferor and including a note or mortgage paid off at settlement."

https://www.irs.gov/instructions/i1099s

Since the seller receives no cash when he/she gives a gift of equity, the gift amount should not be included in the Box 2 amount.  

If you received an incorrect 1099-S, you should request the preparer of the 1099-S for a corrected version.

[Anonymous_]

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@curiousminds wrote:

.....I’m not going todo something that isn’t considered legal....

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It is not illegal; you can either deduct the value of the gift as a selling expense or adjust your basis. Frankly, I would suggest doing the former.

If you are ever questioned by the IRS (which is highly unlikely), you can simply send them a copy of your closing statement (e.g., HUD-1) which should show the amount of the gift.

[Anonymous_]

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@curiousminds wrote:

....I need a source of authority on this. What if I call the IRS, would they tell me what todo?

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They might actually tell you to read the instructions for the transferor on your copy of the 1099-S:

Box 2. Shows the gross proceeds from a real estate transaction, generally the sales price. Gross proceeds include cash and notes payable to you, notes assumed by the transferee (buyer), and any notes paid off at settlement.

[TomD8]

@curiousminds --

The preferred solution is to obtain a corrected 1099-S.

If you are unable to do so, I would report the discrepancy as an adjustment on Form 8949, as suggested earlier by @Hal_Al.

[Anonymous_]

If you actually use TurboTax, @curiousminds, this is an extremely simple procedure.

[curiousminds]

I appreciate everyone’s responses here, I really do, I know you don’t have to. And this info may come in very handy when it comes to filing taxes. However I really need a CPA to handle taxes for this year, not just because of this transaction. I’m willing to pay of course, even for a short conversation, so does ANYone know a CPA here, or a tax attorney, who can validate this, I’m looking for official paid tax advice.

[Hal_Al]

See https://ttlc.intuit.com/community/choosing-a-product/help/what-is-full-service-by-turbotax-live/00/2...

and

https://ttlc.intuit.com/community/choosing-a-product/help/what-is-turbotax-live/00/27191