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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?

    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.


      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?


        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?


          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, 11:28 AM. Reason: Added first sentence to more fully explain NO ALLOCATION


            Thanks JudyL


              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.