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How do I report the gift of equity in the sale of residence. I understand I will have to file a gift tax return, but I am not sure how to report it on 1040.

caroljo
Level 5
My client sold their house to their granddaughter for 325,000 and gifted her 81,250 as gift of equity.  Do I use that amount as a expense of sale or not?
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rbynaker
Level 13
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8 Comments 8
rbynaker
Level 13
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caroljo
Level 5
Thank you all very much for your time.
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abctax55
Level 15

"or not?"

Not.   Gifting to a relative is not deductible (unless that relative is a not-for-profit).

HumanKind... Be Both
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Marc-TaxMan
Level 8

IRS considers it 2 transactions: part sale (with proportional basis); part gift with carryover basis.

Assuming full value is $320,000 IRS considers approx 75% to be a sale (of 75% of their basis) and 25% to be a gift.

The 75% purchased gets new basis to purchaser; the 25% gift gets carryover basis to donee.

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abctax55
Level 15
Good answer - I read the question *they sold the house, gave her cash*.
I really shouldn't answer questions until all the coffee is on board :coffee:
HumanKind... Be Both
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caroljo
Level 5
They sold the house for 325,000, the settlement sheet shows 81,250 "gift of Equity from sellers", with  a balance of 243,000 loan amount from buyer.  So how do I report this?  I probably shouldn't ask questions until all the coffee is on board also.  
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rbynaker
Level 13
I think we had a similar discussion a couple years ago and @TaxMonkey had a great cite for it.  I remember the regs being counter-intuitive to me but I don't remember what they said. 🙂
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TaxMonkey
Level 8
Marc. Taxman if you have a chance please review the thread linked below, and 1.1015-4.  I do not believe that your answer is consistent with the Treas Reg.
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