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Sale of 2nd home at less than FMV

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    Sale of 2nd home at less than FMV

    Mom and dad have a second home (camp) they use sparingly that their son wants to buy. They want to "gift" part of the FMV to their son so they propose:

    Cost $150,000
    FMV $260,000
    SP $208,000

    They want to sell it for $208,000 which will gift their son 20% equity going into the transaction. Clearly there would be a gift of $52,000 and they would file a gift tax return accordingly.

    Is the taxable gain on the sale $58,000 ($208k-$150k)? I assume so but am concerned the closing statement get drafted at $260k with a gift of $52k in the buyer and seller section and the lawyer sends out a 1099-S for $260,000.

    Any thoughts or experience with this?

    #2
    Yes, the taxable gain is $58,000.

    Because the 1099-S will show "gross proceeds" of $52,000 more than the actual sale price, I would just increase the Basis or Selling Expenses on the tax return so it shows the proper $58,000 gain.

    Comment


      #3
      Originally posted by TaxGuyBill View Post
      Yes, the taxable gain is $58,000.
      I haven't researched this, but don't we have to allocate basis between the gift and the sale?

      ( $208 / 260 ) x 150 = $120K basis for sale

      ( $52 / 260 ) x 150 = $30K basis for gift.

      So the taxable gain to parents is 208 - 120 = $88K.

      Son has basis equal to purchase (208K) + gift basis (30) = 238K on property with $260K FMV.

      To do it without taking this into account seems to be transferring some of the taxable income from parent to child, which would not be right, I think?

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        #4
        That's an excellent question, to which I don't know the answer to, but aren't they gifting cash rather than a separate interest in the property?

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          #5
          Full basis is applied against consideration

          Basis is applied in full against the selling price. It is not allocated between sale and gift. This is covered in reg 1.1001-1(e). This section linked below also has 4 examples that may also be useful in this discussion:

          https://www.law.cornell.edu/cfr/text/26/1.1001-1
          Last edited by JudyL; 11-05-2017, 11:28 AM. Reason: Added first sentence to more fully explain NO ALLOCATION
          jklcpa

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            #6
            Thanks JudyL

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              #7
              Glad I covered myself by saying I hadn't researched it! I hope someone tells the son that his $52K "gift" comes with a potential tax hit against it, so it's really not a net $52K gift as actual cash would be. The parents have indeed transferred some of their potential tax liability to son. I presume the holding period also begins with date of purchase, so he doesn't even get LTCG if he were to dispose of the property in less than a year. On the other hand, a Sec 121 exclusion could offset the tax.

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