Free Trial: TheSiteFactory.com

Capital gain when 2nd home is sold with gift of equity

Technical topics regarding tax preparation.
#1
Posts:
8
Joined:
31-Mar-2019 5:29am
Location:
New York
Please accept my thanks in advance. I have a client who is considering selling a 2nd residence to a close relative with a gift of equity. Their adjusted basis is approximately $130,000 and the FMV according to the realtor is $250,000. The goal is to just get the $130,000 basis back but wants to be mindful of capital gain tax. They way I read pub 523 - the buyer will retain the cost basis of the seller thereby increasing the chance the new buyer will pay capital gain in the future. What is not clear - does the seller list the proceeds received as ($130,000) or do they list the the total price including the gift of equity ($250,00)? I read it both ways and now I am not sure. Thanks again.
Deb
 

#2
sjrcpa  
Posts:
4667
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
They have a part sale and a part gift. Seller's basis gets allocated partly to the sale and partly to the gift.
 

#3
Posts:
600
Joined:
10-Jun-2019 4:20pm
Location:
WESTERN USA
For the same situation I did this year with different numbers but client wanted no taxable gain, assume your client sold property for $130K and the 1099-S has $250K as the sell price. I would put $250K as sales price, then under selling expenses offset with $120K with a statement "gift of equity see Form 709".
Relative may get a 121 exclusion in a future year.
 

#4
Posts:
1568
Joined:
28-Apr-2021 7:00am
Location:
FL
Everybody has to draw their own lines, but if seems to me that if you know a transaction is properly treated as part sale part gift, it would be a breach of your ethical duties to report it otherwise.

Having said that, I'm confused about the facts. The OP speaks of a gift of equity with the numbers $250k (FMV), $130k (basis), $120k (equity). To me that means the basis equals the mortgage. I have not seen anything suggesting that the seller will be relieved of the debt secured by the mortgage, so it seems a simple gift would suffice.

On the other hand, the OP says the goal is to get the $130k basis back, which suggests getting paid $130k cash, which would be a part-sale, part-gift transaction.
Steve
 

#5
Posts:
8
Joined:
31-Mar-2019 5:29am
Location:
New York
Gatortaxguy that is correct. The $130,000 is money they used to buy and fix the property. Currently no mortgage exists by the seller. The related buyer will obtain a mortgage for the money needed so the seller comes out whole.
 


Return to Taxation



Who is online

Users browsing this forum: Google [Bot], HowardS, IDunnoItDepends, JAD, Masto, nbzgtfiop324, opacpa, sjrcpa, TAXMASTER, Tenletters and 49 guests