Gift of Equity with John Niemann
John Niemann of Niemann & Company is with us to discuss gifts of equity and the potential tax consequences of them. John has over 35 years experience as a CPA in the tax arena. With the last 15 years dedicated to helping individuals and businesses solve their IRS collection-related problems.
What is a Gift of Equity?
A gift of equity is the sale of the house to a family member or to someone related to the seller at a selling price below the present market value. The gift of equity is the difference between the actual selling price and the market value of the house.
Generally, the Internal Revenue Service doesn’t care who you sell your house to. Whether it’s going to your son, your second cousin or a stranger, you’ll pay the same taxes and get the same treatment. However, there are a few special situations where the IRS takes a more careful look.
If you’re setting up a special transaction that takes advantage of having family involved you may be in for extra scrutiny.
In the most recent example I had two people bought a home as an investment property for $250,000 and wanted to sell it to their child. The home is now worth $300,000, but they wanted to sell it for what they paid. So, the fair market value is $300,000. The child is buying it for $250,000. The difference of $50,000 is considered a gift of equity.
What are the Tax Consequences?
The IRS has an annual gift tax exclusion of $14,000 per person. So in our example the father and mother can give a combined gift of $28,000 to their daughter. Now, because the daughter is married the parents can also gift another $28,000 to the son-in-law. This gets us to $56,000 which is $6,000 more than the $50,000 gift of equity.
So, we’ve got the gift tax figured out, but what are the other consequences? The next issue that comes up would be capital gains tax. In our case this would be a percentage of the difference from the cost basis and the fair market value. We know the parents have a minimum of a cost basis of $250,000. However, this cost basis can increase because of improvements and other costs of home-ownership.
As you can see this can get quite complicated. This is exactly the reason I highly recommend seeing a trusted expert before making major financial decisions. If you have mortgage questions you can always reach me at (314) 472-DOUG (3684). You can also reach John for any tax questions you may have at (314) 941- 7603.
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