Gift of Equity on home sale

[parvitstax]

Home Sale : $430k on 1099-S

Seller's Cost Basis : $150k

Gift of Equity : $170k 

Is the gift of equity an increase to the Seller's Basis? $320k total - $430k = $110k gain? I've read a handful of posts already and still remain confused how this could affect cost basis (if at all). 

[sjrcpa]

No. Their basis is what it is.

The fact that they are selling below market, by making a gift of equity, doesn't change that.

But you have part sale and part gift and potential gift tax returns to file.

[parvitstax]

So the seller still has to pay tax on their full gains (minus any exclusion) and when the new owner sells they have to reduce their cost basis by the gift of equity amount? 

[sjrcpa]

Research the tax treatment of a part sale, part gift transaction.

Buyer/donee gets the donor's basis for the gift part they received.

[parvitstax]

Does that mean if the sale is for $430k and Equity Gift is $170k the buyer's basis when they sell would be $260k? 

[TaxGuyBill]

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@parvitstax wrote:

Does that mean if the sale is for $430k and Equity Gift is $170k the buyer's basis when they sell would be $260k? 

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Yes, they sold it for $260k.

But because there is a 1099-S that says $430k, you may need to get creative.  Some preparers add the $170 to Basis or Selling Expenses to get the gain to show correctly on the tax return.  Some may report it as $260k, but then create a second sale/entry showing a $170k loss and call it an adjustment to home sale.  Others just report it as $260k and tell the client to wait for an IRS notice saying they owe a bazillion dollars, then respond to the IRS notice.

[parvitstax]

@TaxGuyBill This sounds different from what @sjrcpa mentioned. 

Seller bought house for $150k

1099-S states home sold for $430k

Gift of equity $170k

1. Is the seller's cost basis $150k + $170k?
2. Is the buyer's cost basis $260k + $170k?

[sjrcpa]

Bill was giving options for reporting in the software/on the return.

[parvitstax]

So was I correct in my thinking that the seller has a cost basis of $150k + $170k Gift of Equity Addition to Basis = $320k Overall Cost Basis?

@TaxGuyBill said : "Some preparers add the $170 to Basis or Selling Expenses to get the gain to show correctly on the tax return"

but @sjrcpa "No. Their basis is what it is."

This is the confusion I am referring to. Can either of you please clarify? 

[sjrcpa]

"seller has a cost basis of $150k + $170k Gift of Equity Addition to Basis = $320k Overall Cost Basis?"

NO. Think about it. If their basis immediately before sale is $150K, how would selling below FMV/giving some away increase their basis?

Bill was throwing out some ideas on how to get the correct gain to show up in the software/on the return.

[rbynaker]

I think what's tripping you up is the sale price, not the basis.  The 1099-S is just somebody's way of trying to trick the mortgage lender (which now puts you in the position of trying to trick the IRS).  The amount realized on the sale was $260K.  The bogus 1099-S number of $430K minus the "gift" of $170K = $260K.  Basis is $150K.  Gain is $110K.  See 1.1001-1(e).  They could spin it as $999K sale and $739K gift, the amount realized on the sale is still $260K.

New owner paid $260K, that's their basis.  See 1.1015-4.

[TaxGuyBill]

As others said, Basis is $150k and they sold it for $260k.

Sorry, my "yes" was only referring to the $260k sale price, not about Basis.

As Susan and Rick mentioned, I was suggesting ideas for how to report the $110k gain to avoid an IRS notice based on the 1099-S.

[parvitstax]

1) So from what I understand there is no standard method to report Gift of Equity on a home sale and you have to adjust the number and either IRS accepts it or contacts you and you show them the gift to plead your case?

2) Does IRS typically accept the gift of equity as a reduction in proceeds? 

3) Is the simplest method to add the gift as an "other increases to basis" entry on the Adjusted Basis of Home Worksheet?