Gift of equity and taxes
I am selling my house to my parents in order to get equity of the house and pay off the ex wife for her share and get some cash to pay bills. My credit rating is poor right now, parent's have excellent credit and sufficient assets but are retired and not a lot of income. A refinance on my part right now would be futile. I plan on buying the house back in a few years when the economy picks up and I'm back in the good graces of the banks and CRAs. House has been appraised at $271000. Selling price is $227000. We were going to do a second seller note from me to parents to cover the down payment for $37,300 which was the difference between the selling price and the 70% LTV the mortgage co. will loan them. This was never to be repaid. Underwritiing kicked it back and said they won't allow a second seller note from me on this, only from a bank. They say we can do a gift of equity from me to the parents instead for 20% of the selling price or $45400. My question is if I do a gift of equity do they or I have to pay taxes on it? I understand one person can give one other person a gift of up to $11,000 per year tax free. If this is true can I give each of my parents a $11,000 gift in 2002 and then another next week in 2003 for the rest to cover most of the down payment on this? $11,000 x 2 in each year comes out to $44,000 which covers most of the $45,400 dp. Do we actually have to exchange checks and cash them? I don't have $45,400 to exchange right now so if so how can I work this out and write it up? Any help from anyone who has experience with this or who can point me to the applicable tax law would be greatly appreciated. This is my last best hope but I can't stick my parents with thousands in taxes to do it.
I just sold my home in April to my inlaws: The house was worth $130K, I sold it to them for $130K, I gift noted them 20K my wife gift noted 10K. They got a loan for 100K no down took home equity line of 30K.
I am not certain of the tax ramifications, however there is an arms length transaction that the IRS abides by. You cannot sell it as a loss to them, for instance less than you paid.
I had agreed to sell my house for 100K which is what I paid for it. To do so, I upped the price, gift noted the money (10K to FIL 10K to MIL Wife 10K to Father).
My accountant said that this will alleviate my tax on selling the house. Come April 15, we will see...
Hope my example helped.
Clint
I would suggest that you sell house to parents for your payoff or slightly more, and gift note them the money. Uncle Sam, again, will penalize you for selling below what you paid for it. That is what I should have added to my experience...
Clint
Thanks for the response but I'm not selling for less than I paid. I paid $181,000 in 1994 with about $65,000 dp. Current mort payoff is about $111,000 so I have quite a bit of equity wrapped up in it. Selling for $227,000 - $45400 gift of equity and they get mortgage of the rest which I will pay. I'm doing this to get equity out of the house. I need to know if I or my parents will be responsible for tax on this $45400 gift of equity.
Gift taxes, if any, are the responsibility of the donor, not the recipient. Under your scenario, you can take advantage of your annual gift tax exclusion to give your parents $22K this year and another $22K at the beginning of next year tax free. Any gift amount that exceeds the $22K annual exclusion is a reportable gift.
If you have not given any "taxable" gifts to anyone prior to this, then the amount in excess of your annual exclusion just reduces your lifetime gift exclusion. You will have to file a Gift Tax return (form 704) for the year in which the excess gift is made, but you will not actually pay any money in gift tax.
Check with your tax advisor for specific details.