Sale of 2nd home at less than FMV

Collapse
X
 
  • Time
  • Show
Clear All
new posts
  • ttbtaxes
    Senior Member
    • Jan 2011
    • 580

    #1

    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?
  • TaxGuyBill
    Senior Member
    • Oct 2013
    • 2321

    #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

    • Rapid Robert
      Senior Member
      • Oct 2015
      • 1983

      #3
      Originally posted by TaxGuyBill
      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?
      "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
      "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

      Comment

      • ttbtaxes
        Senior Member
        • Jan 2011
        • 580

        #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?

        Comment

        • JudyL
          Member
          • Feb 2015
          • 58

          #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:

          Last edited by JudyL; 11-05-2017, 12:28 PM. Reason: Added first sentence to more fully explain NO ALLOCATION
          jklcpa

          Comment

          • ttbtaxes
            Senior Member
            • Jan 2011
            • 580

            #6
            Thanks JudyL

            Comment

            • Rapid Robert
              Senior Member
              • Oct 2015
              • 1983

              #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.
              "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
              "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

              Comment

              Working...