Determining cost basis and gift of equity for the assumption of a home loan by our daughter

[dremy]

My wife and I transferred the ownership of our home to my daughter and her husband in 2021 by allowing them to assume my VA loan.  The house was assessed by the city at $400,000. My cost basis was $250,000. The remaining loan amount was $210,000.  I am trying to determine if I have to file a gift tax return and what the "adjusted basis of gift" should be on the 709?  I was also wondering if my daughter's basis will be my basis or the loan amount?

[Bsch4477]

See Tagteam post. 

[Anonymous_ · Accepted solution]

Since the mortgage was assumed, this scenario is part-gift, part-sale, but there are no income tax consequences for the donor because the basis ($250,000) is greater than the balance of the mortgage ($210,000).

The value of the gift is the fair market value of the property at the time of the gift less any encumbrances (such as the mortgage). 

As a result, the value of the gift is the fair market value ($400,000) less the mortgage balance ($210,000) or $190,000. Note that the assessment by the city should not be used to determine fair market value at the time of the gift; an appraisal would be optimum or at least a competitive market analysis (CMA).