Gift equity on closing statement

[Gretel]

Just need confirmation that gift equity made by seller of house has no effect on sales price.
Sold if sales price is 200,000 and gift equity is 10,000, sales price still is considered to be 200,000, right?

[Anarchrist]

This is probably a mortgage scam situation. The purchaser is paying $190,000 for the house but the HUD1 and 1099 will say $200,000. On the HUD1 there will be a $10,000 seller's adjustment.

The $10,000 will be a cost of sale and reduce any taxable gain. If the buyer is your client the "gift equity" will reduce his basis by the $10,000.

[S T]

Gift Equity on Closing Statement

I think when this shows on the Closing Statement it is when a parent is selling or releasing the property to a child, or the parent is making the down payment because the children can't, so the escrow statements shows as "gift equity" rather than cash down payment. That is for the mortgage lender's benefit to qualify the buyer for a loan.

If you ask the t/p for more documents relating to the sale, you will find out exactly how the transaction was made.

I believe you use the actual sales price, I am not sure if the gift equity has a bearing, unless you need to file a gift tax return.

Sandy

[Gretel]

Thanks both of you. Actually the gift amount is high enough for a gift return requirement. I just used simple figures. Property was sold to a relative, and, you are right Sandy, purchaser didn't have enough money to qualify otherwise and seller wanted to help.

I still believe this is a gift, which does not reduce the sales price. It could have been someone else making this gift (which was accepted by the mortgage company) and it would have been reported the same way on the closing statement.

Any more suggestions?

[Gretel]

One additional question.

Would it change anything if the sales price was bumped up by the amount of the gift? I think it could if it can be proved by the appraisal. But the seller might as well be out of luck and stuck with the full sales price.

[Gretel]

This is one last desperate attempt to get another opinion on this. But I also understand if I have to figure this out by myself.

[George Boutwell]

Sale, at Reduced Price

If the seller had given away the entire property, there would be no gain, right (assuming there was no mortgage assumed)?

If the seller owned 100 acres and sold 95 of them at FMV and gave away the other 5 acres, only the sale of the 95 acres would be reported, right?

So if the seller sold a property for less than fair market value, the gain is figured only on the actual money received. That is the substance for IRS, even though the forms used by the escrow and mortgage companies show something different. Attach an explanation for why the 1099-S amount does not match up with the Schedule D amount, and advise your client to file a gift tax return for the discount given.

[Gretel]

God bless you.

[Lion]

Gift of Equity

OK, I just got one of these. Mother sold her house to son and daughter in law for less than FMV. Sold $900,000 home to them for $325,000 by way of gift of equity of $575,000. So, file a gift tax return for $575,000 as if cash give to two kids? Or, $900,000 house for $325,000 (her basis is $331,685)?

Then, on her 1040, show sale of house at $325,000 or $900,000? With basis of $331,685 or use prorated basis with lower sales price? Or....?

Thank you very much. Sleep deprived, as are all of you.

[GIMoe]

OK, I just got one of these. Mother sold her house to son and daughter in law for less than FMV. Sold $900,000 home to them for $325,000 by way of gift of equity of $575,000. So, file a gift tax return for $575,000 as if cash give to two kids? Or, $900,000 house for $325,000 (her basis is $331,685)?

Then, on her 1040, show sale of house at $325,000 or $900,000? With basis of $331,685 or use prorated basis with lower sales price? Or....?

Thank you very much. Sleep deprived, as are all of you.

I would report it just as George Boutwell suggested in his post on April 9th in this thread.

Report actual money received as Sales Price. Do Gift Tax Return for the Gift Equity amount.

[Lion]

Thank You

Thank you, Moe and everyone, for discussing this issue.

[Gretel]

I just realized that my post was misunderstood.

I my case sales price was bumped up for mortgage company, seller gave buyer gift equity as down payment, otherwise buyer couldn't afford house. Sales price on closing statement reflects FMV plus gift equity.

I still think that only money received counts and sales price needs be reduced then by gift equity. I also think title company should have reported actual sales price only since the increase was just done to qualify buyer for mortgage.

[Bucky]

Show the gross proceeds and just add the gift of equity in the basis. Go on with life!