Gifting Equity of Home

[peggysioux]

I think I know the answer to the following question, but am second guessing myself so want to be sure. Parent sells home to child lets say for $250,000 and gifts the equity of the home of $50,000 to the buyer. I know the sale price would be $250,000 but does the gift of equity have any effect on the basis or net capital gain of the property?

[TAXNJ]

I think I know the answer to the following question, but am second guessing myself so want to be sure. Parent sells home to child lets say for $250,000 and gifts the equity of the home of $50,000 to the buyer. I know the sale price would be $250,000 but does the gift of equity have any effect on the basis or net capital gain of the property?

Can you explain:

Is the child and buyer two separate people?

How was the gifts the equity of the home of $50,000 to the buyer done and over what period?

[peggysioux]

Buyer and adult child are one in same. Adult child bought home from parent for $250,000 and $50,000 of what the parent would have received from the sale of the property was gifted to adult child. The closing statement for the sale shows in section "Amounts Paid by or in Behalf of Borrower" an amount of $50,000 and description of "Gift of Equity Seller Credit to Buyer. There was also a "Gift of Equity Letter" that states:

This gift of equity is being given to xxxxxx who resides at xxxxxx. The purpose of gift of equity is to cover buyer's down payment and closing costs. This is an outright gift, with no repayment expected or implied in the form of cash or by future services.

So does the gift of $50,000 play into the calculations when determining the capital gain on the sale or is gain strictly based on listed sale price less original purchase price plus any improvements?

[Roland Slugg]

When there is a sale combined with a gift, the transferee's basis is the greater of cost or the transferor's adjusted basis for the property at the time of the transfer. (For determining loss, the basis can't exceed the property's FMV at the time of the transfer.) (Regs §1.1015-4)

Based on the amounts in your OP, the transferee's cost and the transferor's basis are the same ... $250,000 ... so that will become the transferee's basis, as well.. As far as capital gain to the sellers is concerned, if they sell the property for an amount equal to their basis, then they have no recognized gain.

[peggysioux]

Parent's basis is $185,000 (original purchase price plus improvements) so to determine parents capital gain that they have to pay:

$250,000 sale price less the $185,000 for a gain of $65,000. (The $50,000 that the parent gifted to adult child does not come into play when determining the gain)

Then the parent will have to file a gift tax return being gift is over the $14,000 exemption.

Please confirm that I am correct in the above statements.

Secondary question - what would be adult child's basis in property if they sold - $250,000 (the purchase price) or $200,000 (the $250,000 less the gift of $50,000)?

Third question - does the rule for related parties selling for less than fair market value where gain is taxed as ordinary rather than capital only pertain to business (depreciated) property.

Thank you in advance for your input.