If you sale a residence that has equity in it to a related party for the balance of the mortgage is the equity in the house considered a gift? It seems that the equity is not cash in hand and it is unrealized but the related party could eventually turn around and sale the property for a profit and then it would be realized. Was that a gift when the sale took place? Please help!!
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Yes, the gift of equity would be considered a gift, subject to possible gift tax.
TTB, Small Business Edition page 10-24 says:
Below market sale. Property transferred in part as a sale and in
part as a gift is a gift from the seller of the difference between the
FMV and the amount realized. The seller’s capital gain is the difference
between the amount realized and adjusted basis. A loss is
not deductible [Reg. §1.1001-1(e)]. The buyer’s basis is the greater
of the amount paid or gift basis. (Reg. §1.1015-4)
Example: Nadya owns a cabin with a FMV of $200,000 and an adjusted
basis of $50,000. She sells the property to her son Jeremy for $55,000.
Nadya reports a capital gain of $5,000 on Form 1040 and a gift of $145,000
on Form 709. Jeremy’s basis is $55,000 (assuming Nadya paid no gift tax
on the gift). See Basis of Gifts on page SB10-33. -
Sale of Residence
Wow!! Thanks Bees Knees!! I found the same info in DE TTB 21-24Comment
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