Sibling Buyout, Gift Tax, & Capital Gains Tax

[Ark808]

My sibling and I inherited our mothers home after she passed away and we decided to do a sibling buyout. He bought me out for less than fair market value of the property and he is keeping the home to live in with his family. If property was valued at a little over $1M, and I was bought out at $200K, am I subject to pay a gift tax or is my sibling? Also, am I subject to pay capital gains tax?

[tagteam]

The $300,000 gift should be reported on Form 709 since it exceeds the annual exclusion of $18,000 for the 2024 tax year (note that you do not need to report or file).

See https://www.irs.gov/forms-pubs/about-form-709 

However, no gift tax will be due unless the transferor has exceeded the lifetime exclusion of $13.61 million.

See https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

[tagteam]

Note that this transaction is considered by the IRS to be part gift/part sale. As such your basis in the property will be the greater of your sibling's basis in the property or the amount paid by you to buyout your sibling's share ($200,000).

See https://www.law.cornell.edu/cfr/text/26/1.1015-4

Generally, your basis and your sibling's basis would be the fair market value on the date of death of your mother (e.g., $500,000 each).

I am sorry for your loss.

[Ark808]

Im not too sure i understand. I was the one that was received the $200k and my sibling is keeping the house. 
sorry if I’m not making any sense lol

[tagteam]

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@Ark808 wrote:

Im not too sure i understand. I was the one that was received the $200k and my sibling is keeping the house. 

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I apologize because it was I who did not understand (or simply misread your original post).

You are the only who actually made the gift of $300,000 to your sibling since you accepted $200,000 for property that, in fact, had a fair market value of $500,000.

As a result, you would the party that should report the $300,000 gift from you to your sibling on Form 709. 

[Ark808]

Ohhh I understand. Thank you for explaining.

Would you know if Capital gains would apply to me? 

Also, thank you for your condolences. I appreciate it. 

[tagteam]

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@Ark808 wrote:

Would you know if Capital gains would apply to me? 

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With respect to capital gain, you can refer to Section 1.1015-4 (you are the transferor).

See https://www.law.cornell.edu/cfr/text/26/1.1015-4

Your basis would be the fair market value on the date of death of your mother (presumably $500,000).

Thus, if you sold to your sibling for $200,00 and $500,000 is your basis, you would have no (capital) gain or loss and would simply have made a gift of $300,000.

[TomD8]

You've given your sibling what's called a gift of equity.  @tagteam has explained the tax implications for you. 

Just as an FYI, there are also tax consequences for your sibling when he or she eventually sells the house.  These are explained in this FAQ from the IRS website:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...