Reporting basis of gift of equity on Form 709

[acgordon]

My mother sold my brother her home for 400k, 100k of which was a gift of equity. Her adjusted basis of the property is 40k. When reporting the gift on IRS Form 709, do we use 40k for Schedule A, Part 1, column D "Donor's Adjusted Basis of Gift", or should we use 10k (1/4 of 40k) as the 100k gift was 1/4 of the 400k Fair Market Value?

[Carl]

There's no such thing as a "gift of equity". If your mom paid $40K for the house, it was worth $400K and she sold it for $300K, then she has a taxable gain of $260K. Period. End of story.

The buyer purchased the house for $300K and it has a value of $400K giving the buyer an instant $100K of equity. The seller didn't "GIVE" anything what-so-ever. The seller just sold it for less than it was worth. That's it. The buyer's cost basis on the house is $300K, exactly what they paid for it.

[acgordon]

Thank you for your reply. It does contradict other posts in these forums, such as this:

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6 people found this helpful

Gift and estate taxes are one of the most difficult areas of the tax law to understand; and for that reason cause some of the biggest confusion among taxpayers.

Let's begin with the easiest part. You are correct that for the 2016 and 2017 tax years, $14,000 is the most that any one person can "gift" to another, in the form of cash or property, without incurring the necessity of filing a gift tax return (more on that below).

...

Now then, just because someone receives over $14,000 in a gift in a given year, doesn't mean that they owe any taxes. In fact, if any taxes were owed on the gift, they would have to be paid by the gift GIVER, not the gift RECEIVER. Even then, under the current tax code, every individual has a lifetime amount of gift money / property that then can give away, without paying taxes on it. Currently, this amount is $5,490,000 for 2017. That's nearly $5.5 million dollars !!!

But, even where such a large gift-tax free cap exists, there is a legal requirement to file what is known as a gift tax return (IRS Form 709), whenever the gift amount in a year exceeds $14,000 to any individual. Thus, the Form 709 tax return may result in no taxes being due (where the lifetime gifts made to date are under $5,490,000), but the specialized tax return must still be filed with the IRS.

Gift tax returns, Form 709, are not supported by TurboTax. Form 709 does not exist in our software package, although you can view a blank copy at the following IRS.gov webpage:

https://www.irs.gov/pub/irs-pdf/f709.pdf

Given your self-described situation, then, this is the course of action we would recommend. Pay your grandmother the amount that you mutually agree upon: $60,000. The difference between $150,000 (market value) and the $60,000 you pay her is $90,000. You can automatically reduce that gift by $14,000, which is the yearly gift exclusion amount. That leaves $90,000 - $14,000 = $76,000 in home equity that is a (reportable) gift to you, in the year of the transaction.

...

But that is how to accomplish what it sounds like you and your grandmother want to do, and to do it legally.

For additional information on gift and estate taxes, you can also consult this IRS.gov webpage:

https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes

Thank you for asking this important question.
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TurboTaxGeoffreyG , TurboTax Employee; CPA, EA, MBA
TurboTax TaxPro

[wright15671]

Reporting basis of gift of equity on Form 709

I sold my daughter my home.   I gave her a partial gift of equity, but large enough to require form 709 to be filled out so that the IRS can count my gift toward my lifetime estate and gift tax exemption.   When reporting the gift on IRS Form 709,  in  Schedule A, Part 1, column D they ask for "Donor's Adjusted Basis of Gift".  I am  not sure what to provide?  Form 709 instructions provided no additional useful information.   Should I report Full Basis for the home, some kind of proportion basis based on amount of the gift, or do I just report the basis the same as the gift amount.  Not sure what they are looking for and why? 

[Mike9241]

you use both "sold" and "gifted" so please elaborate on what was done.  the IRS wants the basis because that will have an effect on the gain or loss the recipient needs to report should the property be sold. The recipient would need to know this also.   

[Stephen61]

I am not the original poster, but perhaps I can clarify the difference between "sold" and "gifted," as I would love to know the answer to the poster's question. If real property (e.g., a rental house) is sold at a discount to a related party such as a son or daughter, the transaction is a sale but the difference between fair market value and the sales price is a partial "gift of equity." For example, if investment property with a tax basis of $220,000 and a fair market value of $400,000 is sold to a related party (e.g., son or daughter) for $320,000, the $80,000 price discount ($400,000 - $220,000) is a gift of equity that must be reported on Form 709 (gift tax return), but like the original poster, I have no idea what the "donor's adjusted basis of gift" would be for Form 709 purposes. Maybe zero? Questions are as follows:

1. Does the taxpayer/donor have a taxable gain of $100,000 in this example (= $320,000 - $220,000)?

2. On Form 709 (gift tax) what is the "basis" of the "gift of equity" representing the $80,000 price discount? Zero?

3. Is the donee's (recipient's) basis in the property equal to the purchase price of $320,000?

Many thanks

Stephen61

[JohnASmith]

I have exactly the same issue as the OP.  I purchased a second home for $182k.  It never generated income and I made no major improvements, so my basis is $182k.   I sold it to my son & daughter-in-law for $182k so I had no gain to report.  The fair market in 2022 was $340k so I gifted $79k to my son and $79k to my daughter-in-law.  After deducting my annual exemptions I will need to add $126k to my lifetime gift/estate exemption.  I'm having the same difficulty as the OP understanding how to show this on the form 709.  It is not at all easy to figure out.

[JohnASmith]

I realize you are level 15, and I might be out of line here, but I respectfully suggest that you are mistaken.  Yes the recipient will have a cost basis of $300k, but the difference between $300k and $400k fair market value is a gift subject to gift tax.  $100k is far too much to claim the buyer just got a good deal.

[MarilynG1]

The Donor's Adjusted Basis of a home is the price they paid for it, plus the value of any Improvements.

In your case, your Basis was 182K, and you sold it for 182K, so no gift was given.  Your son's basis is also 182K.  

Here's more info from the IRS on Basis of Gift Property. 

@JohnASmith 

[JohnASmith]

MarylanG1  I understand the basis issues.  However, it seems clear that selling property for substantially less than its market value is a gift to the recipient and is subject to gift tax for the difference between the price paid and the fair market value.  Your link did not dispute that point, from what I could see.  I would really like to be wrong because that would simplify this whole process for me and the OP.  Please prove me wrong, I sincerely want you to.  

[JohnASmith]

I think I figured your issue out, which was the same as my issue.  I still have questions , but I think I've answered the main ones for myself.  Schedule A, Column D is the same basis you would use if you were selling the property at market value.  Column F is the value of the gift which is the different between the basis and the fair market value.  When I do it that way the math works.  I also found out that you can only put one recipient on the main Schedule A.  Any additional recipients are supposed to be on a Schedule A Continuation Page.  There is a program available that helps with that and costs $49.95.  I don't think I am allowed to share the source, but Google it if interested.    

[pokey99]

Does one need to provide supplemental documents to support Column D "Donor's adjusted basis of gift" when gifting real estate? The instructions mention supporting documents for Column F "Value at date of gift", but I'm unclear about Column D. Thanks.

[Vanessa A]

Yes. Basically all values you enter, you should be able to support.  The instructions do not limit the supplemental documents to column F.  It is basically it's own category.

Supplemental Documents

"To support the value of your gifts, you must provide information showing how it was determined."

[pokey99]

Thanks Vanessa.

[User3793]

Your incorrect. The mom sold the son the house. She sold him the house for $400, but in reality for $300 because she was gifting him equity of $100k.  Parents do this to make the mortgage more affordable for their child or in our case, my brother was being fronted his portion of my dad's future estate.  The house appraised at $369k. Dad sold it to brother for $300k.  My brother took a mortgage for $125k. This Equity gift primarilly is $300k - $125k leaves $175k equity gift.   The Title companies report this.  There will be no taxes for either as a parent my equity gift up to $13.1 Million in lifetime contributions to their children. That said,  the equity gift has to be reported on Form 709. The Title company will also be reporting the equity gift during title transfer and in most states, the prop tax will adjust on the buyer.  The IRS can increase equity gift value as in our case, while house sold for $300k, the true value equity was the $175k and then another $69k based on appraisal. That said,  the IRS generally does not do that.  All I'm saing has been confirmed by our tax guy, the IRS when I spoke to them and the Turbo Tax expert online.  Thus, the discount to the brother is an Equity Gift. By stated their is no equity gift pure and simple,  you just told this person they don't need a Form 709. They should talk with a tax expert.