If I contributed money to the purchase of a home that I intended to buy back from those buying it, how do I report that on my taxes? Do I need to?

[rachelpoulsen]

My husband lost his job last summer right before we closed on the home that we spent the last year building.  In order for us to get the home and not lose out on our construction deposit, his parents generously bought the home for us using their cash AND our cash that we would have used for our downpayment (purchase price = $533,000, our contribution $100,000, their contribution = $433,000). Now we are in the position to buy the home back from them.  The lender is telling us that we can buy the home from them for $433,000 and then the equity (basically our $100,000 plus the bit that it has appreciated) will need to be gifted us as our downpayment.  My question's are #1 - do we need to record giving/loaning them that money that would have been our downpayment?  #2 - When they do their taxes and report the purchase of a home and then the selling of that home 6 months later, what are the repercussions? #3 - We'd like to avoid them needing to report the gift of equity and having it come from their lifetime allowance.  Can they "gift" the money to my husband, myself and my 4 children to avoid reporting this?

[Carl]

"My husband lost his job last summer right before we closed on the home that we spent the last year building."

So by "last summer" you are referring to 2018? Clarity is required here, as if you're filing a tax return for "this year" we know you mean the 2018 tax year. So does "this last summer" refer to 2018 also?

"In order for us to get the home and not lose out on our construction deposit, his parents generously bought the home for us using their cash AND our cash that we would have used for our downpayment (purchase price = $533,000, our contribution $100,000, their contribution = $433,000)."

Whose names are presently on the deed? Whose names are presently on the current mortgage?

"The lender is telling us that we can buy the home from them for $433,000 and then the equity (basically our $100,000 plus the bit that it has appreciated) will need to be gifted us as our downpayment."

I'm not following you here. How can your parents "gift" money that was yours already, at the time they purchased it? But then, we really need clarity on the above.

" My question's are #1 - do we need to record giving/loaning them that money that would have been our downpayment?"

First, if you loaned them money and "your" names are not on the deed, that would require you to be able to produce loan documents and they would have to pay back that loan to you with interest. Even if you don't charge interest, when dealing with a loan on your tax return, there will be "imputed interest" which can and will make things more complicated than they probably need to be.
 
"#2 - When they do their taxes and report the purchase of a home and then the selling of that home 6 months later, what are the repercussions?"
 
Again, assuming your names are not on the deed, from their perspective (and as far as the IRS is concerned) since they would have owned it less than a year, it's considered an investment. So it won't be reported as the sale of a home per-se. It will be reported as the sale of investment property. Then, since they "held" that investment for less than a year they will pay the higher short term capital gains tax if they sell it to you for a gain. Looks to me like they will be selling it to you at a loss though, if "they" (and only your parents) purchased it for $533K. (where that money came from is irrelevant really, if they are the only owners listed on the deed and the only ones named on the mortgage.)

" #3 - We'd like to avoid them needing to report the gift of equity and having it come from their lifetime allowance.  Can they "gift" the money to my husband, myself and my 4 children to avoid reporting this?"

If you want to go that route, so long as they don't gift more than $15K to any one individual in any one tax year, there is no reporting requirement by either the giver or the recipient. They also don't have to gift the entire amount in a single tax year either. $100K split among six people is $16,666 per person. Ask them to deposit $10K into a 529 plan, Coverdell, or other type of education account for the kids, and then the "gift" will be $90K which split six ways comes out to exactly $15K per person. Of course, they can't deposit it to an account for "your" kids, as that would put them over the $15K threshold. But then, the administrator of a 529 can always change the beneficiary student of that plan, at any time they choose. 🙂

Now I'm no expert on this stuff, but overall I think it would be best to treat the $100K you provided, as a loan that was "paid in full" at the time you purchase the house from them. Then you will only be paying tax on "imputed interest" since no money will "actually" be changing hands in the form of cold cash, from your parents to you. I say this, because "gifting" $100K across 6 people "will" raise eyebrows, but only *if* the IRS were to find out about it. Fat chance of that though, unless you have an enemy determined to make your lives as miserable as they can.

[rachelpoulsen]

-Yes, this all took place summer 2018.

-We are not on the title, but we have a "notice of interest" with the property.  There is no mortgage, the transaction was done in cash.

-They now own the property in full, but we would need to finance the $433,000 to refund their money and get a mortgage in our name.  We no longer have cash for a downpayment needed to qualify for financing.  The property now appraises for $615,000.  The lender says that we will get the loan for $433,000 and have the sellers (parents) give a 'gift of equity' to satisfy the 20% downpayment needed.

- They wouldn't be actually giving us money that we could use or deposit else wear. It would strictly be a gift of equity that would satisfy our need for a downpayment.  
I would rather they didn't report it because no money was actually given, it was our money to begin with.  But the lender is telling us there is no way to verify/document that that money was ours, contributed in the initial purchase.  
I know it's unlikely that the IRS would ever come sniffing about this transaction, but I just want to make sure that in the unlikelihood that they do, everything is legal.  That's why I asked if the $100,000 gift of equity could technically be considered a gift for us and our children, so as to not put us over the $60,000 limit per year allowed to be gifted to me and my husband from his parents.

[rachelpoulsen]

Also, I'm still not sure how I need to report our $100,000 contribution in the initial purchase.  Having it be a loan seems, like you said, "more complicated than they probably need to be."  There are no loan documents, as it wasn't really a loan. That money was our downpayment, same then as it is now...

[Carl]

"The lender says that we will get the loan for $433,000 and have the sellers (parents) give a 'gift of equity' to satisfy the 20% downpayment needed."

Now that I have more facts to work with, that's probably the way to go.

"I would rather they didn't report it because no money was actually given, it was our money to begin with.  But the lender is telling us there is no way to verify/document that that money was ours, contributed in the initial purchase. "

The lender is right. Apparently, you didn't put anything in writing in the form of any type of legal document, at the time of your "contribution".

"so as to not put us over the $60,000 limit per year allowed to be gifted to me and my husband from his parents."

The limit for 2018 is $15K maximum gift per individual, before the 709 Gift Tax return is required. But overall, I think that requirement is kinda stupid. Can the IRS "prove" that you gave your parents $100K? Technically, since it was used to purchase "their" house with, it was a gift from you to them. What do you think the chances are the IRS well "ever" know about that, unless you, your parents, or someone else who knows and doesn't like you, tells them?

Now as far as the gift of equity from your parents to you, that "will" be in writing in some form or another, because that "down payment" (for lack of a better term) will, without question, be documented somewhere. What I'm concerned about is splitting it between 6 people since only two people are using that "gift" as a down payment on a house.

Overall, your parents should gift it to the two of you buying the house, do the 709 Gift Tax Return and be done with it. Besides, their total untaxable lifetime gift allowance is $5.2 million dollars for "each" of your parents. Meaning that as a couple, each of them can gift a max of $15K to each of you, and no gift reporting requirement exists. So while your parents can gift each individual in your household a maximum of $30K per tax year, that means you and your husband can each receive a maximum of $30K from them. (Oh I see now where you got that $60K figure!) and then spread the remaining $40K among the kids.

But like I mentioned earlier, it's that other $40K I'm wondering about, since the kids aren't buying the home with you. Hence, my suggestion to just do the gift tax return and be done with it. It's not like they will actually be paying any tax anyway, and that form 709 takes less than 5 minutes to fill out, even if you write slow.