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04-30-2018 07:00 PM
Hi My wife had purchased a house about 15 yrs ago at $400k. She lived their for 5 yrs, and later converted to Rental for about 10 yrs. Current Mortgage balance is about 200k. Currently the house is prob worth about $550k. We had some PAL. We want to gift the equity to her brother and he gets a loan to cover the remaining balance. We had talked to a Tittle company, and they said the process would be a Sale of the Property to her brother on contingent that he gets a loan for the $200k, and the rest would be the Gift of Equity. I was inquiring about what the 1099-S would show, and was told that it would be the FMV. How will this impact our taxes?
05-01-2018 03:52 PM
This sounds complicated enough that you might want to find an accountant or tax professional to help you with it. There are mutliple things going on here. I don't know much about selling rental property or the gift tax, so my information below may be incomplete.
1) Since you're selling the house (real property) to him, you'll need to pay capital gains tax on the amount of the capital gain between your basis and the FMV when you sold it, but since it's been a rental, calculating your basis is going to be tricky since you have to worry about depreciation, and you/your wife will not likely qualify for the exclusions since she hasn't lived there recently.
2) Since you're also gifting the equity in the real property to him, it's likely you're going to need to pay gift tax on the amount of that equity. Here are the instructions for The Gift Tax Form 709: https://www.irs.gov/pub/irs-pdf/i709.pdf . Since it sounds like you're going to be gifting him about $350k, you could owe quite a bit of taxes on that amount. Just looking at the Table for Computing Tax on p. 19 it looks like it could be close to 30-34% of the gift amount. (Like I said earlier, I'm not very knowledgable about the Gift Tax, so there may be ways to reduce the amount of the gift before you calculate the tax.)
Bottom line, as far as I can tell, is that you may be looking at owing a significant amount of taxes (over $100k), so it's probably worth spending a little money to talk to someone experienced with situations like this to make sure you know what the ramifications are before going ahead.
Karen in NC