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Parent's tax liability for selling 2nd home to child? Capital gains? Gift of equity is involved.

Forum|Forum|7 years ago
June 4, 2019
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My mother owns a second (vacation) home. It's never been her primary residence. I want to buy it from her. She bought it 6 years ago for $123k. The appraised value is $220k. She owes $86k. She want to sell it to me (her son) for the loan value and the rest is a gift of equity. How can we minimize or eliminate her tax liability? I don't know if this helps, but she collects payment on a permanent disability and produces no other income.

Best answer by Hal_Al

I concur with Critter#2, your mother has no capital gain to report for income tax purposes. She does not even have to include the sale on her income tax return, if she normally even files a return.

Her gift of equity to you is $134,000 ($220,000 - $86,000) and that is the amount that needs to be reported on the 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. 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

Your cost basis, in the property, for when you sell it in the future, is NOT the $220,000 it was worth, at the time of the gift. It is also not the $86,000 you paid. Your cost basis is $123,000. The rule, for a gift, is that the recipient's basis is the giver's basis.

Critter

Employee

She has no gain to report ... bought for $123K & sell for $86K so that is a non deductible loss on a personal use asset. What she does need to file is a gift tax return for the amount of the gift she gave you in equity... the TT program doesn't handle the gift tax forms.

D

dpcsmcAuthor

thank you for the clarification!

Hal_AlAnswer

Employee

I concur with Critter#2, your mother has no capital gain to report for income tax purposes. She does not even have to include the sale on her income tax return, if she normally even files a return.

Her gift of equity to you is $134,000 ($220,000 - $86,000) and that is the amount that needs to be reported on the 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. 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

Your cost basis, in the property, for when you sell it in the future, is NOT the $220,000 it was worth, at the time of the gift. It is also not the $86,000 you paid. Your cost basis is $123,000. The rule, for a gift, is that the recipient's basis is the giver's basis.