I have an opportunity to buy my father's rental property at a reduced price using a gift of equity to cover down payment and closing costs with no money down.
The problem is how do my dad's taxes get calculated for gain when a gift of equity is used?
The structure is
$520K appraisal value listed as "purchase price"
-$205K gift of equity
=$315K actual sale price
his tax basis is $280K.
How is this transaction treated for figuring gain?
My dad's CPA tried
A) Treat the transaction as a sale of $520K, then deduct the gift post-tax as if it happened AFTER the sale. This results in about $120K of taxes.
B) Treat the transaction as a GIFT of 205K, then a sale for $315K. This resulted in a tax of about $30K to my dad presumably deducting the gift first from basis, then taxing at the amount of gain.
Are either of these correct?
I think the gift of equity is simply a reduction of the sale price; simply a sale to dad at $315K which he will need to recapture depreciation on 35K of "gain" over his basis (at 25%).
Has anyone done of these and had good results with not taxing the gifted portion and applying it as a reduction of sale price?
Searching the web it seems like the 1099-S amount would indicate $315K, not $520K since the gifted equity is excluded from sale.
Any thoughts? my CPA is driving me nuts
and my loan officer says buying at $315K purchase price will not allow me to use the gifted equity in a loan as purchase price is lower than appraisal.
Just trying to do the right thing for dad and I.
Thanks in advance for any help