Gift of equity

[Dllwar]

My wife and I are buying my father-in-laws house that he lives in now. We are buying it for $145,000. We are using $40,000 gift of equity for a down payment.  The house is appraised at $215,000. Will my father-in-law have to pay any extra taxes because of the gift and for selling it for less than its worth. 

[Bsch4477]

There is gift tax form 709 for your father in law to file but the estate tax exclusion is so high he won’t owe taxes. The gift also comes with cost basis issues for you. All is explained here. 

https://www.investopedia.com/terms/g/gift_of_equity.asp

[tagteam]

You might also want to read through the following Reg and its examples, @Dllwar:

https://www.law.cornell.edu/cfr/text/26/1.1015-4

[Dllwar]

So basically what I have gathered is that he won't be paying any extra taxes from gift or selling lower than market? 

[tagteam]

Correct. This is his principal residence, presumably?

[Dllwar]

Yes it is. 

[tagteam]

So, he shouldn't have any income tax liability on the transfer (assuming he's owned and lived in the house for 2 or more years).

[Dllwar]

Okay, thank you. I appreciate it.