Gift Of Equity
My wife and I are in the process of buying my in-laws home. The current FMV is $500,000. My in-laws would like to provide a Gift of Equity to us in the amount of $150,000. My wife and I will take out a new mortgage to cover the remaining $350,000. After the purchase, my in-laws will remain living in the home with us. What are the tax implications of this situation? For both my in-laws and my wife and I?
For yourselves: No immediate tax consequence. Your cost basis in the property will be $500K (the current FMV).
For inlaws: Provided this has been their primary residence for the past two years or more, there is no tax consequence to them from the sale. The sale profit on their home is tax free.
The $150K gift of equity is reportable on a Gift Tax Return. Assuming that both you and your spouse will be on title, the first $44K of the gift is tax free, while the remainder of $106K is a taxable gift that is reported on the Gift Tax Return. However, unless your inlaws have made each made lifetime taxable gifts totalling $1.5 million, there is no actual tax due on the gift. In this case the Gift Tax Return is just an informational return filed along with your inlaws annual 1040.