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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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capitol gain

Customer Question

To avoid being taxed on a capitol gain (cashing out equity) can my parents give me the cash as a gift? If so how much could it be?
Submitted: 11 years ago.
Category: Tax
Expert:  Sandi Hargrove, SkyHawks replied 11 years ago.
 The capital gain must be reported AND if the cash gift plus all other gifts to you during the tax year exceeds 11000 from each of them, your parents will be required to also report the excess amount on a Gift Tax Return(Form 706) even if no gift tax is due.
Customer: replied 11 years ago.
Reply to Sandi Hargrove, SkyHawks's Post: So let's say my parents gave me $40,000 only $22,000 of it is not taxable?
Expert:  Christopher Phelps replied 11 years ago.

No income/capital gains tax is potentially due unless your parents actually sell the property (to you or someone else). 


They may fund a cash gift by taking out a home equity loan and paying you the proceeds.  If they take the gift approach they will need to file a gift tax return (Form 709; Form 706 is the estate tax return) if their gift to you exceeds $22,000.  Alternatively, they may lend you the money.  If they lend it to you (documented with a note and a stated interest rate) and you intend to repay, then no gift tax returns are due. 


If your parents sell the property they may be able to exclude up to $250k ($500k if MFJ) if they owned and lived in the property as their principal residence for at least two out of five years as of the date of sale.  Keep this in mind as an alternative as well.


To clarify, what is being sold (if anything)? Has the property been owned and used as a principal residence by your parents for at least two years?  If not is it a second residence or a rental property

 
Expert:  Sandi Hargrove, SkyHawks replied 11 years ago.

 The entire capital gain is taxable to your parents.  They must report 18000 of the amount on Form 706 as excess gifts.  No gift tax will likely be due.


You will report none of the amount on your tax return.


If your parents gift to you is actually the home prior to the sale, the situation will be different.  You will be taxed on the gain instead of them and they will still report the excess on their gift tax return.

Expert:  Christopher Phelps replied 11 years ago.

If the parents gift property to you (with a value in excess of $22,000) they will need to get a formal appraisal completed as of the date of the gift.  This appraisal will then be attached as support to FORM  709 (United States Gift Tax Return) where they will report the gift to you.  They will likely not have to write a check but they will use up some of their lifetime gift tax exemption.


Further, you will assume their cost basis and holding period for purposes of calculating your gain on the sale of the property.


Again, please provide more details about what has already been done and what you are trying to do, so a more accurate answer can be given (See my response above).

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