Selling Rental Property to related party

[AnmarieA]

I have a client who has recorded Rental Income and Expenses from property rented by a family member since 2019. In 2025 the taxpayer is allowing the family member to assume the mortgage of the property at the mortgage value. I have inquired of the taxpayer if an appraisal was done on the property to determine the current FMV. I believe the value is close to $463K but need the taxpayer to confirm this amount. I know the sale triggers both a capital gain on the sale and a reportable Gift Tax amount on Form 709. Here is what I do know. 

Capitalize Value as of 8/1/19 $299,120 

Depreciation Taken as of 12/31/24 $49,697

NBV is $249,423

Assumed Mortgage Value $153,062

What would be the reportable transactions on Form 4797? Does FMV impact the calculation? The taxpayer as seller on the closing statement reflects only the assumed mortgage of $153K being paid to the mortgage company and no other expenses. 

With regards to Gift Tax Form 709, is the amount of the reportable gift FMV once confirmed of $463K - Assumed Value of $153K - $38K allowable gift for daughter and son-in-law $272K? 

Does ProConnect handle the filing of Form 709 Gift Tax at the time of filing for 2025?

The closing statement is scheduled for 7/11/25 and this new client is asking for the tax implication of this transaction so I know that there will be another 6 months of income and expenses including depreciation on the property up until the sale as well but that should be a negligible amount.  

Thanks for any impute regarding this matter. 

[BobKamman]

"I know the sale triggers both a capital gain on the sale and a reportable Gift Tax amount on Form 709"

Looks to me like it triggers a nondeductible loss from a sale to a related party.  You're right about the gift tax, though, and the nuisance Form 709 return that likely means nothing but paperwork for you and a higher fee for the client.  

"I know that there will be another 6 months of income and expenses including depreciation on the property up until the sale as well but that should be a negligible amount." 

They're still denying that they haven't  been renting it for less than fair value for six years?  Sure.  Right.  

[weeblewobbles]

Hi , is the gift tax exemption of 1206000 applicable?

[BobKamman]

Do you mean the lifetime gift tax exemptions of 12,060,000, which was applicable in 2022?  It's now up to a thousand short of $14 million.  Yes, it would apply

[weeblewobbles]

thanks thats it! an exemption amount , trying to keep up to date looking at 2022 for 12,060,000

[sjrcpa]

"trying to keep up to date looking at 2022 "

Not trying very hard. 7/7/25

[AnmarieA]

Yes I meant a capital loss (not gain) and you confirmed that it is a non deductible loss because it is to a related party. How will this be accounted for in Proconnect? Record the actual assumable mortgage amount as the proceeds? I was not sure how to record on the disposal. 

The daughter has been paying above 90% of a FMV rent which the IRS allows. The rental loss was marginal in prior years and less than the annual depreciation expense subject to limitations on Form 8582. 

With regards to the Form 709 gift tax do we need an appraisal to determine FMV to calculate the amount of reportable gift income?

[BobKamman · Accepted solution]

Sounds like a place that would rent for $3,000 a month, even with a discount.  And a mortgage for that would be about $1,000 a month.  Even with taxes, insurance and maintenance she should be paying less than current rent.  I always look for money coming back to the family-member "tenant," but no one is around at IRS to look for that these days. 

Technically, since it's a nondeductible loss it doesn't have to show up on a tax return at all, but it's probably safer to report it the same way you would report loss on second (or even principal) home.  There should be a box to check somewhere so that the 8949 code is correct.  

Unless the client has potential for a $14 million estate (excluding the chance of winning a lottery) I wouldn't put too many resources into the gift tax return.  If the friendly neighborhood Realtor, or the more knowledgeable Zillow, says the house is worth $463K, then use that number.  IRS isn't auditing many 709's these days, but in the unlikely event that they want to add $100K to the valuation, tell them you'd agree to $150K.  

[AnmarieA]

Thanks for your response. I know the new mortgage payment for the daughter with the assumable mortgage is $2,309.32 moving forward and the P&I portion represents $900 and the balance is for taxes, insurance and escrow. I will show the "non-deductible" loss on the transfer/sale for transparency reasons in the tax filing for 2025.

I won't spend to much time on the filing of the Trust Return as the taxpayer is high wealth but lower than the revised $15M gift tax exemption signed in the big beautiful bill last week.

All my questions have been answered. 

[sjrcpa]

"I won't spend to much time on the filing of the Trust Return"

What Trust?