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.

[fanfare]

@Anonymous_ 

this is just the same as 

"(2) Examples. The provisions of subparagraph (1) may be illustrated by the following examples:" in the article you referenced but with different amounts..

in your example there are two amounts of 25M

25M +25M= 50M

[curiousminds]

Okay but just to be clear, I am not selling the house for an additional 25k, it’s just being sold at Close to appraised value.

[Anonymous_]

Both you and @fanfare misunderstood the last paragraph of my previous post.

You own a house with a FMV of $200,000. You give someone $25,000 in cash, but only with the understanding that they will purchase your house for $200,000 instead of $175,000. The $25,000 you gave that person (buyer) is not a gift. 

[curiousminds]

Great so this gift of equity letter we had drafted up is null and void, and I really do owe capital gains on everything.

[Anonymous_]

---

@curiousminds wrote:

Great so this gift of equity letter we had drafted up is null and void, and I really do owe capital gains on everything.

---

No, it is not null and void because there is a valid gift in this instance (assuming the FMV is accurate).

You have capital gain to the extent your amount realized ($175,000) exceeds your adjusted basis ($150,000).

[curiousminds]

But because I gave the gift with the understanding that they would buy the house in short order like you said, it can’t be considered a gift. The FMV based on the appraisal is accurate, the purchase price of 200k is actually under the appraisal but within the acceptable 25% range they talk about, since in non-arms length transactions, the seller can no longer sell significantly below FMV because of all the issues that caused during the housing crisis.

[TomD8]

@Anonymous_ wrote:  "You own a house with a FMV of $200,000. You give someone $25,000 in cash, but only with the understanding that they will purchase your house for $200,000 instead of $175,000. The $25,000 you gave that person (buyer) is not a gift." 

I agree.  But why would a seller do that instead of just selling the house for $175K?  What would be the purpose of "giving" the buyer $25K and then getting it right back in the form of a higher sale price?

[Anonymous_]

---

@curiousminds wrote:

But because I gave the gift with the understanding that they would buy the house in short order like you said, it can’t be considered a gift. 

---

No! You follow the part sale/part gift rule that has been stated a couple of billion times in this thread.

This is one transaction, not involving multiple steps in an effort to avoid federal tax.

[curiousminds]

That example still doesn’t make sense. You are forgetting that in that hypothetical it was already established that 200k was FMV. Just because the guy he gave 25k to, used it to partially fund the purchase of his house, doesn’t mean the seller gets that money back and is making a round trip as you said. The seller is ultimately still only getting $175k for his 200k house if you subtract his gift. Since 200k is fair market value he could have sold it to anyone for 200k.

In my opinion what the real difference between being gifted cash, vs what I did, is if it was cash the recipient could have done anything he wanted with it. In my case it only means something to the recipient if they purchase the house.  

“1099-S should report proceeds at $175K, because $175K is all seller received“

That isn’t how we do things though, they report on gross proceeds, and the purchase price is always gross proceeds.

[curiousminds]

Also think of the implications of this. Do you have any estimation of how much money the IRS would owe if this really came to light? It would at least be billions of dollars I’m sure. So why hasn’t anyone gone after them with a class action lawsuit?

[TomD8]

-deleted-

[curiousminds]

Please don’t leave on a sour note, for what it’s worth I ultimately agree with you all. Sadly it just won’t do me, and many others, any good until they figure out their own **bleep** and stop charging people with capital gains taxes on money they never got. The court case you mentioned is a perfect example, except I could never afford representation in a case like that nor would I be able to represent myself. And without any CPA’s who agree, or closing agents, the situation is pretty bleak for all of us. My last hope really is that I get a consultation with a tax attorney, and then that tax attorney agrees with our position, and then can draft something to that effect that I can show a CPA so he is comfortable filing taxes properly. I expect however though that their ego’s will get in the way and they will just say they don’t want to deal with the trouble it will cause, and that it ultimately won’t be worth it for them to risk their liability over. I wish it was different, because believe me I would love to not pay capital gains on money I gift. 

If it makes any difference to y’all I may even literally buy TurboTax for the sole purpose of talking to their CPA’s about the issue, and see if their answer is any different.

[Anonymous_]

---

@curiousminds wrote:

If it makes any difference to y’all I may even literally buy TurboTax for the sole purpose of talking to their CPA’s about the issue, and see if their answer is any different.

---

Or you could conceivably buy TurboTax and do your return yourself using the first two answers in this thread as a guide for this particular scenario. 

Good luck!

[curiousminds]

No, as I said that isn’t an option and I need a CPA to file my returns.