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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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My mother in law purchased a home 3 months ago for $320k. We

Customer Question

My mother in law purchased a home 3 months ago for $320k. We are buying it from her. We have done all improvements to the house and have 20k in receipts not including labor costs. We would like to buy the house from her for $425k with 20% gift equity (Loan amount of $340k). She will realize a gain of 8k or so on the property. Is the remaining 85k "gift" of equity considered a taxable capital gain?
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

Following is my views on your transaction - please correct if needed.

 

Facts

Your mother-in-law is giving you a property with the fair market value of $425,000 and in exchange you pay her $340,000 ($320,000 in cash and $20,000 in building materials used for improvements)

So - you were to receive a gift valued $85,000 or $85,000 / $425,000 = 20% of the property.

Your mother's basis on the property is $340,000 (including improvements).

 

Conclusions:

1. Your mother sells you 80% of the property for $340,000. Her basis on that part is $340,000 * 80% = $272,000.

Her capital gain on that part $340,000 - $272,000 = $68,000

2. Your mother gift you 20% of the property with the value $85,000. Gift is not taxable income for you. Your mother - as a donor - might has to file a gift tax return as the gift is above $13,000 (for 2009) per person per year. However there will not be any gift tax unless her lifetime limit of $1,000,000 is reached.

3. Your basis in the property $340,000 (on 80% you purchase) + $68,000 ($340,000 * 20% - your mother's basis on the gifted part) = $408,000

 

Let me know if you need any help.

 

 

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