Reporting "Gift of Equity" Form 4797??

[kellyoakes]

Hi All!

THANK YOU for your input! You sure have given me a lot more to think about. I'm sorry if my question caused any arguments or hard feelings. That was certainly NOT my intention.

Anyway to clarify a few things...there is a separate line item on the closing document labeled "Gift of Equity" under reductions in amount to seller. It includes the $43,600.00 so-called gift.

The sales price was not inflated to bring a larger commission, as there were no real estate agents involved. After discussion with the buyer, it appears that by them having a larger equity interest in the property, they qualified for a better rate on their loan. Why this required the "Gift of Equity" and couldn't be based on the independent appraisal of FMV is beyond me.

I am deciding whether to report the sale price at the agreed to price (which does NOT match the 1099), per IRC 1001(a), "The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis..." and IRC 1001(b), "The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." Since the seller in this instance only received the agreed to price, I think this is fair, although since it doesn't match the 1099, I'd expect correspondance from the IRS.

My other option, in order to match the 4797 to the 1099, is to report the 1099 amount as the sale amount and take the "Gift of Equity" as an expense of sale. I realize this is probably not technically correct, but it does seem to reflect the true nature of the transaction, and the seller basically signed the "Gift of Equity" letter under duress. I also intend to contact the closing agent and/or their supervisor about this.

Again, THANK YOU all for your input

Kelly

[Bees Knees]

Anyway to clarify a few things...there is a separate line item on the closing document labeled "Gift of Equity" under reductions in amount to seller. It includes the $43,600.00 so-called gift.

In my opinion, that clearly identifies this as a partial sale and a partial gift. The sale price for tax reporting purposes should not include the amount identified on the closing statement as a gift.

The sales price was not inflated to bring a larger commission, as there were no real estate agents involved. After discussion with the buyer, it appears that by them having a larger equity interest in the property, they qualified for a better rate on their loan. Why this required the "Gift of Equity" and couldn't be based on the independent appraisal of FMV is beyond me.

I think they could have a problem here. That sounds like mortgage fraud to me. However, that is between the buyer and the mortgage company. Your client has nothing to do with that.

IRC 1001(b), "The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received." Since the seller in this instance only received the agreed to price, I think this is fair, although since it doesn't match the 1099, I'd expect correspondance from the IRS.

I agree. Great citation. The seller did not receive the total FMV amount and then gift cash back to the buyer, as OldJack would like us to believe. The seller only received the reduced amount, as clearly identified on the closing statement. That is why it says "gift of equity" on the closing statement. It does not say "gift of sales proceeds."

My other option, in order to match the 4797 to the 1099, is to report the 1099 amount as the sale amount and take the "Gift of Equity" as an expense of sale. I realize this is probably not technically correct, but it does seem to reflect the true nature of the transaction, and the seller basically signed the "Gift of Equity" letter under duress. I also intend to contact the closing agent and/or their supervisor about this.

I agree this is not technically correct, but it means there will be no correspondence from IRS. The only time you have to prove anything by doing it this way is if your client gets audited. And since you have documentation to prove the 1099-S was wrong, it should result in a no change audit.

[OldJack]

I agree this is not technically correct, but it means there will be no correspondence from IRS. The only time you have to prove anything by doing it this way is if your client gets audited. And since you have documentation to prove the 1099-S was wrong, it should result in a no change audit.

I agree that this is not correct. I would also point out that as the difference in tax is a significant amount you as the tax preparer should attach form 8275, "Disclosure Statement" to the tax return to document your position and avoid preparer penalties for understatement of tax due to unrealistic position.

[kellyoakes]

Great idea, Jack! Thank you!

Kelly

[Bees Knees]

...you as the tax preparer should attach form 8275, "Disclosure Statement" to the tax return to document your position and avoid preparer penalties for understatement of tax due to unrealistic position.

No, I might attach it and say..."just in case IRS takes an unrealistic position and tries to argue in court a gift of equity is taxable income..."

[OldJack]

No, I might attach it and say..."just in case IRS takes an unrealistic position and tries to argue in court a gift of equity is taxable income..."

You can say on the form anything you think that supports your position for the transaction you have place on the tax return. A comment like Bees suggests would surely peak IRS interest for a look see. dumb!

[Unregistered]

OLDJACK

If a Uniform
Settlement Statement (under RESPA) is used for a transfer
of real estate for cash and notes only, gross proceeds
generally will be the contract sales price shown on that
statement.

That is right, but since the gift also was include on the Settlement Statement-then the gloss proceed on the statement is not the correct amount to put on the 1099-S

[Unregistered]

I've sold "Gift Equity" as a separate asset with a sales price of zero. A gift tax return was also filed.