Gift of equity on HUD-1

[BP.]

Taxpayers purchased a home, lived in it as their primary residence for 8 months, and then sold it. After accounting for the qualifying purchase and sale costs from the HUD-1s, there is a profit of about $14,000, which doesn't qualify for a reduced exclusion.

At sale, and recorded on the HUD-1, taxpayers gave a gift of equity to the buyers of about the profit amount, so in their mind, there's really no profit; they wound up about even.

I don't believe a gift of equity is a qualified selling expense, so it looks like tax is due on the profit, even if the profit was gifted at settlement.

Have I got this straight? Thanks!

[Gretel]

Is the reason for doing this to have a higher purchase price so buyers could get higher mortgage? That is the only thing that makes sense. If this is a non-related party and the purchase price agreed upon what actually the lower price maybe then there is no profit? Seller never received funds, right?