Gift Tax

[GTS1101]

I have a client who bought a house for 365,000 approx three years ago in California. He was unable to pay the mortgage so he transferred the title to his brother and the house was refinanced into his brothers name. There was no sale of the property his brother just gave it to him because he could no longer afford it. Two questions. Does the brother who gave the house away have to file a gift tax return showing the gift. And what would the value be? 365,000 or FMV? Also the brother who received the gift what would his basis be if he were to sell the property. The property was quit claim deeded from one brother to another.

Thanks for your help!

Greg

[Roland Slugg]

FMV less debt assumed

Dear GTS1101

The value of the gift was the FMV of the house at the time less the debt assumed or taken subject to. If the difference exceeds $11,000 (or $12,000 depending on the year), a gift tax return should be filed. (If the donor brother was married, his wife can be treated as giving an equal value.) An appraisal would be very helpful, and it's possible the donee's lender got one before making its new loan.

The donee brother's basis will be the same as the donor brother's basis was, increased by the GT paid (if any) and also increased by any additional costs, such as escrow fees, title insurance, recording costs, notary fees, etc. paid in connection with the transfer.

If the donee brother paid any points, those should be deductible on his own return if the home was used as his primary residence, or amortized (along with other loan costs) if the home is used as a rental.

[Kram BergGold]

I disagree

When the house was given it was subject to a mortgage which the donee assumed I assume. So to me there is a sale valued at the value of the mortgage, a non deductible loss probably for the brother who gave the property away. Then there is a gift which is the diffeernce between the mortgage balance and FMV. If this difference is greater than $11,000 then a gift tax return is required. The donee's basis would be the value of the mortgage plus the value of the gift.

[Roland Slugg]

According to the original post ....

There was no sale of the property his brother just gave it to him because he could no longer afford it.

The fact that the donee assumed the mortgage, or paid it off via a re-fi, doesn't change the fact that this was a gift ... not a sale.

Even if the debt was greater than the home's FMV (which the original post does not say was the case), nothing changes. If this were the case, however, the difference would represent a gift from the recipient brother to the relinquishing brother. There is no COD income.

The donee's basis would be the value of the mortgage plus the value of the gift.

'Fraid that's not true either. The gift tax paid, if any, can be added to basis, but not the value of the gift itself.