Taxpayer asks:
My father wants to sell me his house (approx. value of $300,000) for what he owes on it ($54,000). I know, a pretty sweet deal. Some friends advised him that the best way to do this is simply to “give” me the house, and I will send him a Christmas card with $54,000 in it. What is the best way to complete this transaction when it comes to taxes. The house is located in Florida.
Taxgirl says:
This question has lots of layers… So, I’ll start off my re-emphasizing that you should consult with your tax professional – there is a lot of information outside of this transaction (such as your father’s estate planning situation) that will affect the outcome.
But here is the basic result: Your father is making a gift to you in the amount of $246,000. A below market sale is generally considered a gift to the extent of the difference between fair market value and the “selling price” – in your case, $300,000 (FMV) – $54,000 (purchase price) = $246,000 (gift). Since your father is entitled to give you $12,000 per year without any consequences, the taxable value of the gift for federal gift tax purposes is $12,000 less, or $234,000.
With that, I differ with your friends as to the best way to complete the transaction. If your father and you are both in agreement that this is a sale for $54,000, then treat it like a sale – none of this cash in the envelope nonsense. If you attempt to hide the sale price, it may be difficult for you to later prove that the entire $300,000 was not a gift. The amount of the gift is important for estate and gift tax purposes. Additionally, if you treat the whole thing as a gift and you “gift back” $54,000, you’re just complicating the situation. You can read more about what gift tax is at my prior post.
As far as income tax goes, assuming that there’s nothing strange about the mortgage, etc., the sale should not result in federal income tax consequences. There should be no capital loss or gain.
And here’s where I’m a lawyer and tell you some “buts”…
Your father’s estate could be affected by the gift, depending on his health and financial situation. Even if he’s not subject to federal estate tax, making gifts may affect Florida Inheritance Tax, so be sure and check that out.
Any claims for Medicaid or other government assistance made by your father could also be affected by such a gift.
There are also basis issues for you to consider. The FMV of the property, the donor’s basis and the value of the gift will all affect your basis for purposes of future sale. You’ll want to run that information by your tax professional.
See what you get for asking a lawyer?
Seriously, while the transaction feels simple, it may not be, taking into consideration the bigger picture. Since the amount of the gift is significant, I’d check your tax professional before moving forward, just to make sure there are no surprises. There may even be a better way to structure the transaction, depending on your circumstances.
Good luck – and enjoy your “new” home!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
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