Gifts Of Equity Can Produce Unexpected Tax Pitfalls

January 10, 2022

Tax issues, said Neil V. Carbone, partner at Farrell Fritz, P.C., in New York, include gift tax and income tax. A sale for less than fair market value involves a partial gift. If the amount of the gift exceeds certain thresholds, the gift would have to be reported by the donor on a gift tax return and it could trigger a gift tax.

Gain in the sale, between the discounted price and the seller’s basis, would likely be reported on the seller’s tax return.

Income tax treatment is somewhat more complicated, Carbone said. The fair market value of the residence will exceed the parent’s income tax basis. The donor will recognize a gain to the extent the purchase price exceeds the basis plus possibly the amount that can be excluded from gain on the sale of a residence.

The recipient’s basis will be the amount he or she actually paid, rather than the fair market value of the residence. “But things get a little more complicated if the donor’s basis exceeds fair market value,” Carbone said. Selling the residence in the future, for instance, will incur a larger capital gain than if the recipient had paid fair market value.

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