Gift of Equity

[Hoosier]

Client purchased a house and sold it 13 months later to his child. House was never the seller's residence. Per settlement statements, the sale price was $400,000. The purchase of the house plus improvements was $275.000. Capital gain looks like $125,000. On the settlement statement for the sale of the house, a Gift of Equity of $110,000 appears in the child's (buyer's) column. Client is expecting his gift to either show as the sale price to be reduced by the gift of equity or for his basis to be increased by the gift of equity to realize a gain of $15,000. I don't see the gift of equity as either a selling expense or as an increase in basis. As a result, I'm showing $125,000 in capital gain. Am I correct or am I missing a way to utilize the gift of basis to reduce capital gain?

[rbynaker]

See if 1.1001-1(e) is on point:

Example 1.
A transfers property to his son for $60,000. Such property in the hands of A has an adjusted basis of $30,000 (and a fair market value of $90,000). A's gain is $30,000, the excess of $60,000, the amount realized, over the adjusted basis, $30,000. He has made a gift of $30,000, the excess of $90,000, the fair market value, over the amount realized, $60,000.

Follow the money, I'd guess that the amount realized was $290,000 and everything else is smoke and mirrors to make a bank happy. Was there a gift tax return filed?

Rick

[Lion]

And, you get to charge big bucks for preparing a gift tax return!

[Gene V]

These Gift of Equity sales has always been confusing. Just a few question. Thanks

How do you show this on the tax form,? You probably got Form 1099-S showing sale price of $400,000
So, you would have to show the $400,000 as sale price (schedule D or 4797) which ever form you
are using, then your base of $275,000, which would give you a gain of $125,000, however with the
gift of equity, your gain is only $15,000.

Also, what is the base of the house to the child, when they go to sell it? Is it $400,000 to $290,000

[TAXNJ]

See if this applies:

News Release Date: 10/9/17

Amount Realized Reduced by Gift of Equity

Cross References
• Fiscalini, T.C. Memo. 2017-163, August 24, 2017

The taxpayer was unable to make his mortgage payments that became due on his house. In order to avoid foreclosure, he sold his house to his parents. His parents financed the purchase by taking out a loan that was used to pay off $664,048 of the taxpayer’s outstand- ing mortgage debt.The closing statement showed that “Total Consideration” for the sale and purchase was $975,000. The closing statement identified the difference as a “Gift of Equity to Buyer.” The title company issued the taxpayer a Form 1099-S, Proceeds From Real Estate Transactions, showing “Gross Proceeds” of $975,000 and that “Property or Services [Were] Not Received.”

The IRS claimed that the amount realized on the transaction was $975,000. The taxpayer argued that the amount realized should be his $664,048 liability relief.

IRC section 1001(b) states that the amount realized from the sale of property is the sum of any money received plus the fair market value of property other than money that is received. The regulations for this code section state that the amount realized includes the amount of liabilities from which the transferor is discharged as a result of the sale.

The taxpayer argued that the amount realized should be the $664,048 of liability relief because the transaction was in part a sale and in part a gift to his parents.The IRS argued the total consideration of $975,000 shown on the closing statement controls the deter- mination of the amount realized. In support of this argument, the IRS said: “Petitioner and his parents, in full knowledge of the relevant facts agreed to a sales price of $975,000, which is, by definition, the fair market value of the property on that date.

The tax court rejected the IRS argument. That argument disregards the definition of the term “amount realized” in IRC section 1001(b), the regulations, and pertinent case law. The amount realized from the sale of property is the sum of any money received (in- cluding liability relief), plus the fair market value of property other than money that is received. The taxpayer received no cash and no other property from his parents as a re- sult of the sale other than the mortgage debt that was discharged. The court said the IRS failed to understand that the transaction was in part a sale and in part a gift. [Reg. §1.1001-1(e)(1)]

The tax court ruled that the amount realized on the sale was the $664,048 of mortgage debt relief, minus the taxpayer’s settlement costs at closing.

© 2017 Tax Materials, Inc. TheTaxBook News 1

[Hoosier]

More information... Client did receive 1099-S for $400,000. It would appear that due to the 1099-S that column (d) of the form 8949 would show $400,000. If the gain may be reduced by the gift of equity, it would seem to make sense to include this amount in column (g) Amount of Adjustment as opposed to adding it to basis in column (e). On Sch D, the gift of equity would be included in column (g) Adjustments. The end result would be a realized capital gain of $15,000. These seems to be the conclusion that I'm coming to based on my research and these posts. Gift tax return not yet filed.