Reporting Sale of Home with Gift of Equity

[jthornton]

How would you report the following scenario on Form 8949/Schedule D?...

Clients "transferred" their second home to their son this past November as a part sale, part gift. The Settlement Statement (HUD-1) reports the Contract Sales Price as $180,000, the FMV of the home. The son financed $144,000, the "true" price of the home and the amount my clients actually received. The difference of $36,000 is listed as "Gift of Equity" on the HUD-1. The home had an adjusted basis of $120,000 in the hands of my clients at the time of sale.

According to Section 1.1001-1(e), my clients' reportable gain would be $24,000, the excess of $144,000, the amount realized, over the adjusted basis, $120,000. They would also have a gift of $36,000 reportable on Form 709 US Gift Tax Return.

On Form 8949, I was thinking the best way to report the sale is to list the $180,000 under Sales Price (since that's what is listed on the HUD-1), the $120,000 under Cost or Other Basis, ($36,000) under Adjustments to Gain or Loss, and $24,000 as Total Gain. I would use code "O" in column (f) to classify the adjustment. Code "O" is basically used for adjustments that are not described by any of the other codes.

I have read where some preparers would just reduce the selling price by the gift of $36,000, while others would add it to the cost basis of the home.

Any feedback would be greatly appreciated! Thank you!

[Burke]

The "real" selling price was $144K. Was a 1099-S received? If so, you need to adjust for what was actually reported to the IRS, and that is one way of doing it. The buyer actually takes the $36K as part of his basis, but you are not dealing with the buyer, just the seller. Saw a lot of these during the boom years of real estate sales and liar loans. The purpose was to get more money out of the bank since they would not loan 100%, and it CYA'd them to Fannie Mae. And you saw where that went. If you feel comfortable that the actual FMV was $180, then you are okay.

[jthornton]

The "real" selling price was $144K. Was a 1099-S received? If so, you need to adjust for what was actually reported to the IRS, and that is one way of doing it. The buyer actually takes the $36K as part of his basis, but you are not dealing with the buyer, just the seller. Saw a lot of these during the boom years of real estate sales and liar loans. The purpose was to get more money out of the bank since they would not loan 100%, and it CYA'd them to Fannie Mae. And you saw where that went. If you feel comfortable that the actual FMV was $180, then you are okay.

The HUD-1 was received as a "substitute statement" for a 1099-S. It reads as if the Sales Price of $180,000 is the amount of "Gross Proceeds" that will be reported to the IRS. That's why I thought it would be best to report the $180,000 and then show the adjustment separately.

I was given a copy of the appraisal, so I do feel comfortable that the actual FMV was $180,000.

I did a little research, it appears the buyer's adjusted basis would be the $144,000 if I'm not mistaken... Section 1.1015-4

[Burke]

I did a little research, it appears the buyer's adjusted basis would be the $144,000 if I'm not mistaken... Section 1.1015-4

It appears so in this case, and I stand corrected. It gets complicated depending on the circumstances, and whether the sale price is above or below the transferor's adjusted basis, and its FMV.