Gift of Equity

[Gene V]

I'm not sure about the base of the home that the son bought from his mother.

Example: Mother sells home to son FMV $300,000, selling contract shows selling price $300,000
and Gift of Equity of $50,000, Son gets loan for $250,000 to complete the sales.

Question: What is son's base in the house when he goes to sell it? Is it $250,000 or $300,000?

[TAXNJ]

Though there....

I'm not sure about the base of the home that the son bought from his mother.

Example: Mother sells home to son FMV $300,000, selling contract shows selling price $300,000
and Gift of Equity of $50,000, Son gets loan for $250,000 to complete the sales.

Question: What is son's base in the house when he goes to sell it? Is it $250,000 or $300,000?

is a TTB 2006 post with same subject wth very extensive reply posts if you wanted to do a search. However, you may find the attached article helpful:

http://corporate.findlaw.com/finance/tax-basis-of-inherited-and-gifted-property.html

[Gene V]

Thanks TAXNJ--I did read most of the 2006 post--still not sure. When you get a 1099-S for selling real estate, every thing seems to change.

Let me break this down in a couple scenario

1. Mother paid $250,000 for the house and sells it for $300,000 to the son, still giving a Gift of Equity of $50,000. She still has to pay tax on the capital gain of $50,000 plus file Gift tax return.
Do you agree?

2. Same as number 1, except instead of giving son Gift of Equity, mother gives son $50,000 cash and son turns around and gives mother the $50,000 cash for down payment and still finance $250,000. Mother still pays tax on the gain and files Gift tax return.

Still same question--what is son bases ?

[TaxGuyBill]

$250,000

Mom's basis was $250,000, Son Paid $250,000. The son's Basis is the higher of those two numbers (plus any Gift Tax actually paid).


As a side note (this doesn't seem to apply to your situation), if the mother's Basis was higher than the FMV at time of gift (so the property had decreased in value while Mom owned it), it can be a bit funky if son sells it at a loss.

https://www.law.cornell.edu/cfr/text/26/1.1015-4

Despite what the documents say (such as a 1099-S), Mom's selling price was $250,000, and that is the amount that she uses for tax purposes. If the 1099-S shows $300,000, I would enter $300,000 for the sales proceeds and $50,000 as a 'selling expense'.

[Gene V]

Thanks to both of you for answer and links.
Gene

[Burke]

1. Mother paid $250,000 for the house and sells it for $300,000 to the son, still giving a Gift of Equity of $50,000. She still has to pay tax on the capital gain of $50,000 plus file Gift tax return.

Am assuming this was not her principal residence to which she would have qualified for 121?

[Gene V]

Am assuming this was not her principal residence to which she would have qualified for 121?

Actually it was, (the numbers are fictitious) she would only have to file gift tax return--I was trying to get a higher base for the son--hoping for the $300,000.

Thanks for response.

[Burke]

She still has to pay tax on the capital gain of $50,000 plus file Gift tax return.
Do you agree?

If it qualifies under 121, why would she have to pay tax on "capital gain" of $50K?

[Gene V]

In the resident sales- she wouldn't--mistake on my part.

Just thinking-if she gift the $50,000 in cash, then the son could use the money for down payment and gets the full $300,000 for his base, with no
gift of equity. Mother would still have to file gift tax return.