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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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Capital Gains on sale of depreciable asset to family member

Customer Question

We have been renting property from my parents for 3 years. We are now purchasing the property. My parents are gifting us the equity in the house to use as a down payment. We are trying to figure out if there will be any capital gains tax and if so who has to pay it.

Here are some of the details:
My parents purchased the house in 1992 for $194,000.
The home is considered rental property on my parent’s taxes has been depreciated for 2 years.
Their adjusted basis-$192,000 (depreciation added back in, declared loss from rental deducted)
Current Appraised Value-$250,000
Our loan amount-$200,000

Since my parents are selling it to us for $200,000 I understand the difference between the sales price and the fair market value is considered a gift. What do we use to calculate the fair market value? Is it the appraised amount?

Would my parents have any capital gains tax?
If so what amount does it apply to?

If we sell the house before living in it for 2 more years, what is our basis for figuring if we would owe capital gains tax?

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

The appraised amount normally is a good measure of the FMV. If your parents are giving you and your spouse the "equity", that would be a gift of $25,000 each. This is in excess of the amount that can be given in one year without requiring a gift tax return ($11,000 per person * 2 = $22,000). They would need to file a gift tax return showing this excess gift by April 15 of next year. There is likely not going to be any tax due, but it still must be filed.

They would report the sale portion based on a sales price of $200,000 and using 80% of the basis. They must use the 80% basis because of the proration between the total value and the portion sold versus the portion given.

You basis will be $200,000 + 20% of their basis.

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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: I understand the gift part and how that works. But the sales contract is going to reflect $250,000 even though our loan will be $200,000. The lender is using the $50,000 gift of equity as our down payment. So is it OK for them to report the sale as $200,000 or do they need to report the sale as $250,000?

So to calculate the capital gains tax, would they compare the current adjusted basis plus the cost of the sale to the actual amount they are receiving ($200,000) or to the amount on the sales contract ($250,000)?

I've never ready anything about the proration between the total value and the portion sold in calculating the basis. Wouldn't that be covered by the fact that the IRS requires them to gift us the difference between the sales amount and the FMV since it is a sale of property between related parties?

Thanks for your help.

Expert:  Jon Andrews replied 11 years ago.

Based on this scenario, they are "selling" the house for $250,000 and then gifting $50,000 back to you. In that circumstance, their capital gain transaction will be based on the sales proce of $250,000 and there will be no proration of the basis.

The proration would come into play if they actually "sold" the house for $200,000 and gave you the equity. This is called a "bargain sale" and requires that the basis be allocated between the portion of the property sold and the portion given.

Keep me posted if you have additional questions in this regard - I am just down the road.

[email protected]

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