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Old 03-26-2017, 05:48 PM
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Accounting for a Gift of Equity with family sale

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

Reno



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Old 03-29-2017, 11:41 PM
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Join Date: Mar 2017
Posts: 3
I sent off the loan application, but are these assumptions correct?

I used the Cornell legal site (free to public for tax law) and my interpretation is

a) Gift of Equity is not taxable as gain, just a gift. A gift return is required if over 14K annual exemption and a gift of equity letter is used for loan closing. Most people will not pay any gift taxes until they reach the 5.45 lifetime million exclusion.

b) For figuring taxable gain: The "actual amount realized" is the purchase price minus gif (amount of money the seller actually get to pay off their loans and to keep)t. In this case $315K is the "amount realized" and should be the amount entered on 1099-S . The 520K purchase price is only to show market value at the time of gift for loan purposes.

c) Taxable gain with a partial gift to family is simply the amount realized (after gift) minus tax basis. In this case $315K - $280K = $35k taxable gain.

d) If the property was a rental, there will be depreciation to recapture as ordinary income.

My calculations are
$520K Purchase price at fair market value
-205K gift of equity
$315K amount realized (actual sale price to seller and loam amount for buyer)

seller's taxes:
$315K amount realized
-280K tax basis
=$35K taxable gain

$35K taxable gain
15% guess of the seller's tax bracket
25% guess of the seller's tax bracket
=8K estimated taxes due

If all this checks out with 2 different CPA's, I will be happy.

Anybody know if my assumptions are off for some reason? We're looking to close the deal in the next 4-6 weeks.


Last edited by renog : 03-31-2017 at 05:03 AM.


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