Here is my email to this particular CPA…
“So when we spoke you wanted me to send you an email with some of the details of this transaction so you could verify what the most correct way of filing a tax return for this transaction would be.
The home that my cousin is selling to me has not been his primary residence for some time but we do believe he was living here for at least 1 year of the last 5. He would be selling me the house for $176k, and my purchase price would be 213-215k. This amount was initially based on the lender's best guess of the FMV of the home, the appraisal did come in higher at $255 but my lender thinks this amount is just fine as it is still within 25% of the appraised value. So the gift of equity will be my down payment which is roughly the difference between his selling price of $176k and my purchase price of $213-215k.
Now the closing agent I spoke to said that when they fill out the 1099-S that they will use my purchase price for gross proceeds. This transaction is not finalized yet so maybe there is time to find someone who will correctly fill out a 1099-S and make this easier for everyone. If you know of a simple and concise way I can express our position on the fact that gross proceeds should not include a gift of equity that may help me with our current closing attorney's or it may help me find ones who are willing to do this right. Or maybe you think that angle is a lost cause, let me know.
If a correct 1099-S is not possible the options we discussed were and in no particular order...
1. Adjust cost basis.
2. Add to selling expenses.
3. Make the adjustment in column (g) of form 8949.
Some relevant tax code and links if it makes your task any easier...
For the transferor...
26 CFR § 1.1001-1 - Computation of gain or loss
(e) Transfers in part a sale and in part a gift. See Example (1)
Also see Amount Realized (b)
https://www.law.cornell.edu/cfr/text/26/1.1001-1#e%22%3Ehttps://www.law.cornell.edu/cfr/text/26/1.10...
For the transferee...
26 CFR § 1.1015-4 - Transfers in part a gift and in part a sale. (understanding basis)
1099-S instructions (Gross proceeds)
https://www.irs.gov/instructions/i1099s#idm[phone number removed]480
Relevant court case (see judgement on "amount realized"):
https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/tax-court-determ...
So would like to know what the most prudent way of filing and correcting for an incorrect 1099-S is, but also if you think there is a better way we could do this transaction I am all ears on that too.”
And here was his response…
”I did do some research to confirm what I thought was the best treatment and while I can’t find any support from the IRS as to why the lawyer wants to report the gross “sales price” and not the cash transaction I don’t think there’s going to be any way to convince them otherwise. I did see a few articles that seemed to support this treatment but nothing directly from the IRS so I think the lawyers are doing this to just cover any possible liability. One of those things where they know the sales price from the agent so they have to report that and not the sales price regardless of what the IRS instructions say.
That being said I don’t think it will be an issue with the reporting on David’s 2021 return, what you’ll need to do is report the gross sales price on the Schedule D Part II column D, then include the gift of equity in the cost basis column E, increasing David’s basis and reducing the gain on the sale. Based on my research column E is more appropriate than an adjustment on column G. David will also be required to file a 706 gift tax return showing the gift of equity as a gift to Andrew. David is going to need Andrews SSN and address to report on the 706 so just an FYI of the requirement.
For you Andrew, your initial thought was incorrect your basis in the building is going to be what you paid for it plus the gift of equity. So, if you ever end up renting the place or if you sell and maintain primary residence you can include the total amount on the 1099S for the purchase price as your basis in the home.
https://www.irs.gov/faqs/cap[product key removed]s-and-sale-of-home/property-basis-sale-of-home-etc/...
For David, one additional item needs to be considered when you calculate the gain on the sale of the property. Since you lived in the home for 1 of the last five years you can still exclude a portion of the gain as the primary residence exclusion. But be aware that if you use a portion of the exclusion you can’t use it again for at least another two years. So for example say you end up calculating $10k in the allowed exclusion, if you sell your current primary residence as single sometime in the next two years, then the max exclusion allowed would be $250k (the max allowed for single taxpayers) less the $10k already used. This article explains it pretty well:
https://www.journalofaccountancy.com/issues/2002/oct/thehomesalegainexclusion.html
You also need to decrease basis by the depreciation taken on the property while it was rented out. The calculation can get pretty complicated so I do recommend hiring a CPA to prepare your 2021 tax return. I talked with my boss yesterday and she said we’re not taking on any new clients at this time so you’ll need to search around locally for someone. Just make sure you go with a CPA and not H&R block or the like, RE sales are complicated and takes experience to get it right.“
Hope that helps.
