gift of equity

[JenMO]

Client sold her home and farm to her kids. On the seller's side, there is a subtraction for an amount that is title "gift of equity". Is that added to the cost? Not sure what to do with this amount. Any ideas?

[solomon]

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§ 1.1015-4 Transfers in part a gift and in part a sale.

(a) General rule. Where a transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of—

(1) Whichever of the following is the greater:

(i) The amount paid by the transferee for the property, or

(ii) The transferor's adjusted basis for the property at the time of the transfer, and

(2) The amount of increase, if any, in basis authorized by section 1015(d) for gift tax paid (see §1.1015–5).

For determining loss, the unadjusted basis of the property in the hands of the transferee shall not be greater than the fair market value of the property at the time of such transfer. For determination of gain or loss of the transferor, see §1.1001–1(e) and §1.1011–2. For special rule where there has been a charitable contribution of less than a taxpayer's entire interest in property, see section 170(e)(2) and §1.170A–4(c).

(b) Examples. The rule of paragraph (a) of this section is illustrated by the following examples:

Example 1. If A transfers property to his son for $30,000, and such property at the time of the transfer has an adjusted basis of $30,000 in A's hands (and a fair market value of $60,000), the unadjusted basis of the property in the hands of the son is $30,000.

Example 2. If A transfers property to his son for $60,000, and such property at the time of transfer has an adjusted basis of $30,000 in A's hands (and a fair market value of $90,000), the unadjusted basis of such property in the hands of the son is $60,000.

Example 3. If A transfers property to his son for $30,000, and such property at the time of transfer has an adjusted basis in A's hands of $60,000 (and a fair market value of $90,000), the unadjusted basis of such property in the hands of the son is $60,000.

Example 4. If A transfers property to his son for $30,000 and such property at the time of transfer has an adjusted basis of $90,000 in A's hands (and a fair market value of $60,000), the unadjusted basis of the property in the hands of the son ins $90,000. However, since the adjusted basis of the property in A's hands at the time of the transfer was greater than the fair market value at that time, for the purpose of determining any loss on a later sale or other disposition of the property by the son its unadjusted basis in his hands is $60,000.

[JenMO]

I'm doing the seller's return, not the buyer's. TP sold property to son at discounted amount, and loan co put in the gift equity. Son had been renting property and mom put that rent towards price, but I didn't know. I had been reporting rent and taking off expenses, taxes, deprec, etc. I'm guessing that some of the gift equity was the rent, but not all of it. Her basis is high, and if I can report the full amount (which includesthe gift equity) and still come out allright, would I have to do a gift tax return? Losses would not be allowed since selling to a relative at less than FMV, correct?

[solomon]

Sorry. From the seller's perspective on sale and part gift. §1.1001-1(e) Examples.

Example 1. A transfers property to his son for $60,000. Such property in the hands of A has an adjusted basis of $30,000 (and a fair market value of $90,000). A's gain is $30,000, the excess of $60,000, the amount realized, over the adjusted basis, $30,000. He has made a gift of $30,000, the excess of $90,000, the fair market value, over the amount realized, $60,000.

Example 2. A transfers property to his son for $30,000. Such property in the hands of A has an adjusted basis of $60,000 (and a fair market value of $90,000). A has no gain or loss, and has made a gift of $60,000, the excess of $90,000, the fair market value, over the amount realized, $30,000.

Example 3. A transfers property to his son for $30,000. Such property in A's hands has an adjusted basis of $30,000 (and a fair market value of $60,000). A has no gain and has made a gift of $30,000, the excess of $60,000, the fair market value, over the amount realized, $30,000.

Example 4. A transfers property to his son for $30,000. Such property in A's hands has an adjusted basis of $90,000 (and a fair market value of $60,000). A has sustained no loss, and has made a gift of $30,000, the excess of $60,000, the fair market value, over the amount realized, $30,000.

[Burke]

I'm doing the seller's return, not the buyer's. TP sold property to son at discounted amount, and loan co put in the gift equity. Son had been renting property and mom put that rent towards price, but I didn't know. I had been reporting rent and taking off expenses, taxes, deprec, etc. I'm guessing that some of the gift equity was the rent, but not all of it. Her basis is high, and if I can report the full amount (which includesthe gift equity) and still come out allright, would I have to do a gift tax return? Losses would not be allowed since selling to a relative at less than FMV, correct?

If I am understanding your post, there is a subtraction on the seller's side, which simply reflects a reduction in the contract price. I am assuming the kids who bought the properties were in negotiations for a loan. You mention the "loan co" put that on there. I thought these shenanigans went out the window with the mtge loan crisis and rules changes, but essentially it appears the only thing this "gift of equity" did was inflate the contract price to justify a higher mtge loan on the books.

[joanmcq]

apparently that doesn't apply if there is a liability on the property for more than the basis. Have an audit case where there was a 'gift of equity' that inflated the sale value so the kids could cash out. Parents are stuck with paying the tax on the gain.

Per CCH "However, a gift of property subject to a

liability in excess of basis results in a sale or exchange (see .0201, below)."

Question on this one however: is the gain the difference between the amount of the ensuing mortgage & the seller's basis (assuming no down payment) or the inflated price on the sales doc & the seller's basis?