Sale of 2nd home at less than FMV

[ttbtaxes]

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]

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.

[Rapid Robert]

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?

[ttbtaxes]

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?

[JudyL]

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

[ttbtaxes]

Thanks JudyL

[Rapid Robert]

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.