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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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gift of equity tax

Customer Question

My husband and I "bought" a home for our son 6 years ago. He was 20 y/o at the time & simply could not qualify himself for a home loan.Our plan was to sign this home over to our son when he was ready.

Now our son is 26 & married. He's a full time student (not working) and his new wife is the only income. The newly weds are anxious to take this home over. My husband & I do NOT want to make a dime, we also don't want this transaction to cost us anything.

They have qualified for a $97,loan. We would like to explor the "gift of Equity" options but know very little about this. There is 50-60 thous in equity.

We talked with our tax accountant and was told in one conversation the "gift of equity" was free, in a different conversation, the same man said my husband and I would be taxed on that money. (20%) , Can you help clear this up?

On paper the house is a "rental". My husband & I have poured money into the home (Furnace, windows, ect) and depriciated items on our tax forms. We never lived in this home.

The appraised value is $120; the pay-off is $59. The bank suggested the contract price we give as much as $44, as "gift of equity". 1.)How would this be treated? 2.)What kind of capital gains/ tax is involved? 3.) Does our son & wife take a loss of difference between the appraised value & selling price? 4.) Who gets taxed on the gift of equity (buyer or seller)? Thank you for your help
Jan Heichel
[email protected]

Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

The bank's suggestion of a $44,000 gift of equity stems from the fact that a person is allowed to give another person $11,000 per year with no gift tax consequences. Therefore, if you and your husband each give your son and his wife $11,000, that is a total of $44,000. If done this way, there would be no taxable gift. Then with an appraised value of $120,000, there is only a $76,000 loan needed. The issue that you are going to be facing is the treatment as a rental property. You don't mention what your total basis is nor how much depreciation you have taken in total. Those two amounts will affect how you are taxed at the time of the sale to your son. The difference between the "sale price" (not reduced by the gift amount) and your total net basis will be taxable as a gain to you. The depreciation amount will be recaptured at, for the most part, 25% tax rate. Any "excess gain" (over your original purchase price) will be tax as long term capital gain - maximum 15% rate.


There are other factors that could come into play. Please feel free to post additional information and I will refine my answer accordingly.


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