Can we use the gift of equity to minimize the impact of the capital gain on a home?

Forum|Forum|6 years ago
June 4, 2019
2 replies
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We purchased a home for our daughter and her family. Now that their credit is fixed, they want to purchase the home from us. We will be facing a capital gains tax of approximately $28,000. We want to eliminate this gain by a gift of equity $14,000 from me and $14,000 from my wife. Is this possible and how is this reported on our Tax Returns?

Best answer by Hal_Al

Yes. You simply report the actual sales price (after the $28,000 "discount") on form 8949 and sch D. You are not allowed to show a loss on the sale.

Since the gift is less than the gift tax rule, you do not need to file a gift tax return. "Gift Tax" is somewhat of a misnomer. Even though a gift tax return may be required, very few people ever actually pay federal gift tax. So, you could make an even bigger gift of equity to avoid capital gains. But keep in mind that long term capital gains are taxed a lower rate than ordinary income and at 0% for many people.

The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.

See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html

Hal_AlAnswer

Employee

Yes. You simply report the actual sales price (after the $28,000 "discount") on form 8949 and sch D. You are not allowed to show a loss on the sale.

The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.

See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html

michelle-cammara

Isn't this an investment and so when sold to the daughter, the parents will have a short term gain on that investment, since they never lived in it?

btkean92

Ok in that case we just bought home from my mom that we have been living in. 150k was purchase price but total cost was 153k Appraised at 170k (not sure if relevant). Gifted 34k and our loan was 120k. Her orig cost was 134,700. So how would that math work?

AmyC

Employee

See my math below.

Your mom's basis is what it is for the sale to you.
I am not sure if you paid $153,000 and the gift got you the lower mortgage of $120k.
It does not make sense for the gift to go from $170k to $150k.
Did something else happen?

Without the gift, you would not have gotten the mortgage, financing and house is what it sounds like to me. This gives you a basis of $153,000.

@btkean92

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curiousminds

I am in a situation where A. I don’t know how todo my own taxes. And B, 3 different CPA’s have all told me the same thing which is that I have to pay capital gains taxes on an investment property I sold to family with a gift of equity.

Details:

- I originally payed 150k for the house.

- House appraised at 200k when sold.

- My sell price was 175k.

- Gift of equity was 25k.

- Purchase price was 200k.

I’ve repeatedly been told now that I will have to pay capital gains taxes on 50k, and not the 25k I expected and still believe is correct. Why should I have to pay capital gains taxes on money I didn’t actually get? Not only that but everything I have read says that the gift of equity should lower the cost basis of the buyer, which makes me paying capital gains tax on the full 50k difference make even less sense.

How can I make these lazy and uninformed CPA’s see the light?