Property gift to child who assumes the mortgage

[pokey99]

If I make a gift of real estate to my child, who assumes the outstanding mortgage, which values do I use on form 709? Also, the value has increased since I purchased; will I need a Schedule D for capital gains, and which values do I use there?

More details: the title transfers to my child; I remain as a guarantor on the mortgage where my child is the primary mortgage holder.

E.g.:

My cost basis = 1,000,000

Outstanding mortgage = 700,000

FMV = 1,200,000

Thanks you.

[Mike9241]

have you checked with the mortgage company about transferring primary responsibility for payment from evidently you to your child? many would treat this as a sale making the mortgage due immediately. 

[pokey99]

Thanks for your reply. Yes, the mortgage company in fact suggested this route. The mortgage will belong to my child, who will be responsible (but I will remain a guarantor in the case of default).

[Anonymous_]

Based upon your figures, and the assumption of the mortgage, the amount of the gift would simply be the FMV of the property on the date of the gift less the mortgage balance that was assumed (i.e., the equity in the property).

[pokey99]

Thanks, that was my thinking. It seems that I would be responsible for capital gains tax, perhaps prorated based on equity vs loan amounts. In that case I’m wondering what values I would enter in schedule D.

[Anonymous_]

The mortgage assumption in these instances is generally considered a sale (at least in part).

However, since the mortgage balance is less than your adjusted basis, there are no income tax consequences on the transfer.

[pokey99]

Thanks tagteam. So no capital gains tax nor schedule D. I appreciate your responses.

[pokey99]

Hi tagteam, I hope you can help a bit more. On form 709, I believe that Schedule A, Part 1, column D (Donor's adjusted basis of gift) would be my purchase cost + closing costs + capital improvements (none), all minus the value of the mortgage at the time of the transfer/assumption by my child.

Going from my example above (with my basis ending up at 1,000,000), column D would be 300,000. And I guess I would include an attachment outlining the numbers and calculations.

Does this sound right?

Thanks again.

[Anonymous_]

Yes, that sounds correct. You would not include any encumbrances in your adjusted basis and would attach a statement showing your calculations.

[pokey99]

Thanks again for your great help tagteam!