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.

[TaxGuyBill]

You are welcome.

As a tax professional, if you ever have other tax questions, you may want to try the 'Accountants' forum to post any questions (but we do have a weird sense of humor over there, so don't be offended at anything we say over there).

[fanfare]

 A gift has nothing to do with the basis of your property which you sold.

[TomD8]

If parents had a gain on the sale but gifted a portion of the equity, they still must report the capital gain on the sale before the gift, and pay any capital gains tax.  The gift may require filing of Form 709, Gift Tax Return.  Parents' gain is their actual amount realized minus their adjusted cost basis.
From a tax point of view, there are two transactions: the sale of the house, followed by the gift of equity.
See this previous TT answer by a tax pro:  <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3138092-2nd-home-sold-with-gift-of-equity">https://ttlc.intuit.com...>

[LynnL419]

I've read through all of these threads but I am still confused.  I purchased a house in March to redo for my daughter and son-in-law.  I purchased the house for $230 and put $90 into it so my overall investment into this home is $320.  I want to sell it to my daughter and son-in-law for $320.  I know that I can gift them $14,000 each ($28,000) without having to do any forms for the IRS but if I gift them the equity in the house (the houses FMV is around $380 but I am only gifting them $28,000) when I receive my 1099 for taxes I know it will show the selling price as $348,000.  Will I have to pay capital gains on the $28,000?  Also, do these types of things flag the IRS?  I don't want to get involved in all this if it is not worth it.

Thank you in advance!!  

[tagteam]

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@LynnL419 wrote:

I've read through all of these threads but I am still confused.  I purchased a house in March to redo for my daughter and son-in-law.  I purchased the house for $230 and put $90 into it so my overall investment into this home is $320.  I want to sell it to my daughter and son-in-law for $320.  I know that I can gift them $14,000 each ($28,000) without having to do any forms for the IRS but if I gift them the equity in the house (the houses FMV is around $380 but I am only gifting them $28,000) when I receive my 1099 for taxes I know it will show the selling price as $348,000.  Will I have to pay capital gains on the $28,000?  

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Capital gain on this transaction and gift tax issues are completely separate components.

You will have a capital gain to the extent the sale price exceeds your purported basis of $320,000.

However, if you sell it to your daughter and son-in-law for $320,000 when the FMV is $380,000, you will have made a gift of $60,000 (difference between fair market value, $380,000 and the selling price, $320,000). Although you will likely owe no gift tax (the exemption is $11.4 million for 2019), you will have to file a gift tax return (Form 709), which you will probably want to avoid.

In short, you would benefit from estate planning advice from an experienced professional. For one thing, the annual gift tax exclusion for 2019 is $15,000, so you could gift them a total of $30,000 this year. For 2020, the exclusion should be at least $15,000 so you could gift a total, again, of $30,000 on January 1, 2020. That covers the entire $60,000 that you would be gifting (of equity). So, you could consider gifting $30,000 (cash) this year, and then closing on the property early in 2020.

Again, it would be wise to consult an estate planning professional.

[LynnL419]

Thank you, this made much more sense.  Can I do this on an investment property?  I read you cannot.  

[tagteam]

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@LynnL419 wrote:

Thank you, this made much more sense.  Can I do this on an investment property?  I read you cannot.  

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There is no reason, statute, rule, or regulation preventing you from gifting investment property.

Only the calculus might be a little different in terms of basis (e.g., whether you claimed depreciation deductions on, for example, rental real estate).

[LynnL419]

Also, would my 1099 reflect the $380?  Thank you again!!

[tagteam]

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@LynnL419 wrote:

Also, would my 1099 reflect the $380?  Thank you again!!

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No. Your 1099-S should reflect the actual sale price ($320,000) - the actual dollar amount that changes hands.

[LynnL419]

Finally (I swear!!) Is there any personal reason I would want to avoid the 709 form?  I just don't want to hurt myself in the process.  Thanks again, you have been a tremendous help!!

[tagteam]

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@LynnL419 wrote:

Finally (I swear!!) Is there any personal reason I would want to avoid the 709 form? 

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It appears daunting to the uninitiated and can present a challenge. You also do not want to make an error when preparing and filing this particular form (and the IRS retains these things just about forever). 

You can take a peek at the form, itself, at the link below. Professional preparation of Form 709 is highly recommended.

https://www.irs.gov/pub/irs-pdf/f709.pdf

[vandana1955]

can a parent reduce the sale price of property being gifted by the amount of equity gift?

[AmyC]

@vandana1955 No but you may need to file a gift tax return. There are special rules when selling to a related party.

Publication 523 (2020), Selling Your Home | Internal Revenue Service

[Fred McGovern]

But if you gift $30, 000 equity in one year and $30,000 of equity in another year doesn't that reduce the basis of the house from 320-60 to 260, then sell for 320-260=60 gain. I'm assuming you are gifting equity.

[tagteam]

This is an old (very old) thread, but your question has already been answered in one of the responses:

Capital gain on this transaction and gift tax issues are completely separate components.