Selling a Property For Less Than Market Value

[danh123]

Hello,

I am a landlord that usually invests in apartment buildings. Someone that has done some work on my properties in the past was going to lose the house he was renting because the landlord was going to sell. They landlord had initially agreed to sell him the house but changed his mind. I ended up purchasing the house and renting to the existing tenant with the agreement that I would sell it back to the tenant at a later time.

It has been a few years and it looks like the tenant is ready to purchase the house from me. I paid around $250,000 for the house. I will sell it for $260,000 per my verbal agreement with the tenant when I purchased the house. I think the house may appraise for around $400,000.

I am wondering if I will be subject to gift tax in this situation. It seems that I definitely would if this was a family member or close friend but I would consider this tenant more of an off and on business associate. They were never employed by me,  just a handyman I would hire from time to time. 

What do people think? I am going to check with an accountant/tax advisor but thought I would check here first.

Thanks.

[tagteam]

You're on the right track in terms of seeking advice from a local tax professional and, hopefully, legal counsel.

Note, however, that contracts for the sale of real property are not enforceable unless in writing and signed by the parties to be charged.

[Mike9241 · Accepted solution]

you need an advisor. if you anticipated that when the sale date arose the FMV would be more than what you agreed to sell it for, there could be a gift element involved.  The gift tax rules apply to all gifts. the question is whether you made a gift. Even if it is a gift, unless you used up your lifetime exemption of over $12 million there would be no gift tax.  another possibility if the rent was above FMV was that you had a rent to buy situation.  

[danh123]

I thought value could go up but it went up much more than I expected.

Am I able to talk to someone that works for TurboTax about this or will I have to talk to an outside tax advisor?

[tagteam]

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@danh123 wrote:

I thought value could go up but it went up much more than I expected.

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Which basically indicates that you did not have donative intent at the time you made the deal (that and the fact that the tenant is a complete, unrelated stranger) - tough argument to make that this was a gift in any way, shape or form. 

There is no one who can advise you at TurboTax so you should consult with local tax and/or legal counsel.

[Critter-3]

I agree ... seek professional assistance but you probably don't have a loss to deduct in fact you probably have a taxable gain if you have been reporting the rental properly on the Sch E and taking the required depreciation.

Basically the FMV is immaterial  ... you bought the home for an amount  + the cost to buy + any improvements made - depreciation allowed or allowable + cost to sell = adjusted cost basis   Selling price - adjusted cost basis = a profit or loss    If you have a profit then the profit less depreciation recapture (taxed as ordinary income) = capital gain taxed as cap gain rate.