Basis of Property received as payment for a loan

[sali108bwt]

Child loaned cash to parent over several years and parent could not pay it back. Parent gave her personal residence to child in payment of this loan. What is the basis to the child of this home? I assume the amount of the loan. There never was any attempt by the parent to repay the loan. Is there anything to consider because this involves related parties?

[mactoolsix]

Parents "sold" the property for the amount of the loan (+ accrued or implied interest).

Any gain by the parents is ordinary income. No section 121 allowed.

Child's basis is the price paid (loan amount + accrued or implied interest).

Mike

[Roland Slugg]

If these were unrelated parties, I might agree with the above post. The relationship, however, changes everything. Besides, if these were unrelated parties, there would have been an attempt to "equalize" the FMV of the property given in settlement of the loan to the loan amount itself, plus accrued interest, perhaps. Although no information was given in the OP regarding the accumulated amount of the loans nor the FMV of the parent's house, it is possible that the house's FMV was several times the amount of those loans.

I would advise these folks to report the gift of the house on a gift tax return, F-709, and that the child's basis in the house is the same as the parent's (or, for calculation of loss, FMV if less). The child might be able to add his basis in the loans to the gift-basis in the house, but I'd have to look into that further.

[Snaggletooth]

Never Pay Anything

I would advise these folks to report the gift of the house on a gift tax return, F-709, and that the child's basis in the house is the same as the parent's (or, for calculation of loss, FMV if less)

I emphatically agree, as there is likely never a downside to this approach. The amount of the gift applies first to the huge marital exemption from the estate before the first penny ever has to be paid.

A parent unable to pay their obligations at this point, has virtually zero chance of exhausting the marital exemption and probably will never even have to file an estate return. So Roland's suggestion has very little chance for a downside.

Additionally, the facts and circumstances of such a loan arrangement between related parties can arouse suspicion. I'm not saying anything is wrong or misrepresented, only to state that the climate does exist.

[ATSMAN]

I emphatically agree, as there is likely never a downside to this approach. The amount of the gift applies first to the huge marital exemption from the estate before the first penny ever has to be paid.

A parent unable to pay their obligations at this point, has virtually zero chance of exhausting the marital exemption and probably will never even have to file an estate return. So Roland's suggestion has very little chance for a downside.

Additionally, the facts and circumstances of such a loan arrangement between related parties can arouse suspicion. I'm not saying anything is wrong or misrepresented, only to state that the climate does exist.

I agree with this approach because there may not be any "legal papers" that says that the child loaned money to the parent and the house was a collateral.

[mactoolsix]

Okay - I like Roland's idea of calling it a gift . . . .

However, it would be nice to know the following:
Amount of the loan
Was the loan in writing and recorded
FMV of the home

I have seen some parents loan several hundred thousands of $$ to their kids, and FMV of homes around here are easily $1-$2M +