cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

My parents are selling me a house they just bought a little over a year ago for the same price they bought it for ($189,000); I've been renting the house from them since they bought it and am currently live in in it.  The house has been appraised at $225,000 and the bank I am working with has suggested that my parents provide me with a gift of equity for the difference between the appraised value ($225,000) and what they are making me pay ($189,000), which comes to a $36,000 gift of equity.  If we go through with this, will my parents have to pay taxes on the gift of equity they provided me?  I've researched this some and I feel like they won't have to, but I dont' know if I interpreted what I read correctly.  As of right now, my understanding is that $14,000 of the gift of equity won't have to be reported at all and the remaining $22,000 will have to be reported on Form 709 and will be counted towards a lifetime gift allowance and not taxed as well.   

1 Best answer

Accepted Solutions
Level 12

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

I wanted to correct some information that someone posted here a month ago for anyone who might, as I did, stumble across the question thread.

UPDATED FOR 2018 Tax Year (filing in 2019)

  • .As to the issue of Gifting only and the value of the Gift being $36,000, the apparent problem that the $36,000 is in excess of the joint exclusion amount of $30,000 could be avoided if the $36,000 were spread over two years.
    Per donor person to per recipient maximum excludable gift = $15,000. - for Tax Years 2018 & 2019
    Form 709 Gift Tax implications (not income tax!!!)

----------------------------------------

As to the matter of Gifting a house, or for that matter any asset cash included, just to be clear, Form 709 is the filing submittal form for Gift Tax which is part of the combined and Estate Tax in the Federal taxation system, separate from Income Tax.  Specifically, since 2013 and continuing into 2018, any person can give any other person a gift, in part or in whole a total of $15,000 (2018) without incurring the need to file a Form 709.  Thus a married couple could give without any worry or need to file a total of $60,000 (2018) to a married couple, such as a daughter and son--in-law.  Separate from that is the point that if one gives more than the Exclusion Amount of $15,000 (2018) to another person in one year, the excess is considered part of the donor's Lifetime Gift exclusion amount. This is only relevant if the donor individually, in 2018, has an Estate at, above, or near $5.6 million [for 2018]. 

--------------------------------------
NOTICE:  Following discussion uses the original financial numbers as it was answered in 2014.  

The problems that this question of a month ago raise are two part, separate from the whole discussion of the Gifting.

  1. The parents formally rented the house, for payment received, to their son.  It would appear that in the approximate year from purchase the parents never actually resided in the house and instead it was for all practical purposes rented out over the ownership time period. Thus, it would be considered under the tax laws as an investment property.  Therefore they should have:  reported as income the rent, depreciated the value of the house according to the necessary schedule, deducted not only any real estate taxes but any other cost of maintenance that they paid as deductible against the rental income

  2. As to the sale itself and recognition of Capital Gain, since it would seem clear that the house was never the parents' primary residence, the stated Fair Market Value ("FMV") of $225,000 does create a realized gain, and not just of the $36,000 but in fact more since the Basis in the house would have been reduced by one or more years of depreciation.  So the question arises, what might transpire?  If a Form 1099-S were to be filed by a broker, or attorney, handling the transfer of ownership, given that the house was not a primary residence, the marital gain exclusion of $500,000 does not apply.  It is possible that the IRS might inquire as to the necessary reported gain.  That might further raise the question of the rental.

So you see, all in all, this renting between family members can and may lead to many complications.

8 Replies
Level 12

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

I wanted to correct some information that someone posted here a month ago for anyone who might, as I did, stumble across the question thread.

UPDATED FOR 2018 Tax Year (filing in 2019)

  • .As to the issue of Gifting only and the value of the Gift being $36,000, the apparent problem that the $36,000 is in excess of the joint exclusion amount of $30,000 could be avoided if the $36,000 were spread over two years.
    Per donor person to per recipient maximum excludable gift = $15,000. - for Tax Years 2018 & 2019
    Form 709 Gift Tax implications (not income tax!!!)

----------------------------------------

As to the matter of Gifting a house, or for that matter any asset cash included, just to be clear, Form 709 is the filing submittal form for Gift Tax which is part of the combined and Estate Tax in the Federal taxation system, separate from Income Tax.  Specifically, since 2013 and continuing into 2018, any person can give any other person a gift, in part or in whole a total of $15,000 (2018) without incurring the need to file a Form 709.  Thus a married couple could give without any worry or need to file a total of $60,000 (2018) to a married couple, such as a daughter and son--in-law.  Separate from that is the point that if one gives more than the Exclusion Amount of $15,000 (2018) to another person in one year, the excess is considered part of the donor's Lifetime Gift exclusion amount. This is only relevant if the donor individually, in 2018, has an Estate at, above, or near $5.6 million [for 2018]. 

--------------------------------------
NOTICE:  Following discussion uses the original financial numbers as it was answered in 2014.  

The problems that this question of a month ago raise are two part, separate from the whole discussion of the Gifting.

  1. The parents formally rented the house, for payment received, to their son.  It would appear that in the approximate year from purchase the parents never actually resided in the house and instead it was for all practical purposes rented out over the ownership time period. Thus, it would be considered under the tax laws as an investment property.  Therefore they should have:  reported as income the rent, depreciated the value of the house according to the necessary schedule, deducted not only any real estate taxes but any other cost of maintenance that they paid as deductible against the rental income

  2. As to the sale itself and recognition of Capital Gain, since it would seem clear that the house was never the parents' primary residence, the stated Fair Market Value ("FMV") of $225,000 does create a realized gain, and not just of the $36,000 but in fact more since the Basis in the house would have been reduced by one or more years of depreciation.  So the question arises, what might transpire?  If a Form 1099-S were to be filed by a broker, or attorney, handling the transfer of ownership, given that the house was not a primary residence, the marital gain exclusion of $500,000 does not apply.  It is possible that the IRS might inquire as to the necessary reported gain.  That might further raise the question of the rental.

So you see, all in all, this renting between family members can and may lead to many complications.

Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

They can each gift you $14,000 apiece and if you are married or have kids they can gift to them also. This can reduce or eliminate the amount reported on the form 709. Of course I can't see what the problem is if they sell it to you for less than market value if they want to. You may ask more questions as to the need for the "gift" unless you are trying to cash out some equity or using that amount as a "down payment" to get financing.

Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

I am using the amount "gifted" as part of my down payment on the loan.  The bank said the purchase price would say $225,000 with a gift of equity of $36,000 and an actual loan amount of $189,000.  Does this change anything?  Will my parents still use the same process (gift of $14,000 from each parent and the difference on the form 709, with no taxes to be paid on either)?  Or will the $36,000 be taxed and considered anything other than a gift?
Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

use the 709 and the tax will only be reported on the amount over $28K
Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

Will the parents pay capital gain taxes on the $36,000 i.e. the difference between the $225,000 listed sale price and what they paid for the house $189,000? I have this exact pending transaction with my uncle.
Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

The gift and the sale are 2 separate transactions. The gift may require a gift tax return. The sale may be taxable if the personal residence exclusion on the profit is not allowed.
HRB
Level 1

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

How can the parents be involved with paying tax?  Wouldn't they have a loss which, -although is not deductible on a primary or second home - is for a rental property.  So if they file an amended for the year the rental income was received and pay their income tax on that,  - if there was in fact any gain over their costs, then it seems this whole discussion should revolve around the recipient of the gift's value, not the parents
Level 20

Do my parents pay any taxes on a gift of equity for a house I am buying from them for less than the appraised amount?

@HRB - you are tagging onto a 4 year old question about "A gift of equity".  It has nothing to do with rental value or a loss - it is about gifts.

If you have a new question please start your own thread and supply the details.