Sale of (free) home with gift of equity

[Love2Cruise]

Each year I get a new first; some of which make me want to cry - some just make my head numb...especially with so many returns to do.

So this is the scenario... 

• TP and spouse were deeded a home at no cost to them by his mother. 
• TP sells home to nephew for $100K 
• TP received 1099-S for $100K
• At closing, proceeds were distributed to seller (TP) as follows:
  • Mortgage pay off  (still in mother's name) - $46,522
  • Seller credit  - $700
  • Closing Costs - $735
  • Taxes - $18
  • Gift of equity - $36,496
  • Net to seller - $15,529

My questions - 

• When reporting the sale of the home, do I reduce the sale price by the gift of equity and the mortgage payoff, or just the gift of equity?
• If the mortgage was still in the mother's name, would that be an expense?
• If the above is correct, what's the workaround if the 1099 was issued for the full sales price?

I'm also preparing a 709 since the gift of equity is over the limit by $2496. Is this correct as well?

As always, your input and assistance is MORE than greatly appreciated! 

[Norman2001]

You don't say what the mother's basis in the house is. For a gift, basis transfers so start with that. If your client took on the mortgage, then add mortgage to the basis. 

Did your client live in the house? If so, how long? The home sale worksheet should help you with the sale. I would report the full sales price. The worksheet has entries for sales costs. 

[Love2Cruise]

And I thought I'd included all the details. Brain freeze! 

TP estimates the mother's cost basis is $40,500.

TP has never lived in the home and didn't take on the mortgage. But he paid it off for her from the sales proceeds. So would that be an expense or the cost of the home for him?

[TaxGuyBill]

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@Love2Cruise wrote:

• When reporting the sale of the home, do I reduce the sale price by the gift of equity and the mortgage payoff, or just the gift of equity?
• If the mortgage was still in the mother's name, would that be an expense?
• If the above is correct, what's the workaround if the 1099 was issued for the full sales price?

I'm also preparing a 709 since the gift of equity is over the limit by $2496. Is this correct as well?

---

Just the Gift of Equity.

No.

To avoid an IRS notice, you would probably want to add it to Selling Expenses.  Adding to Basis would have the same effect.

Yes, Gift Tax returns would be required, probably two of them (one from each spouse).

[Love2Cruise]

@TaxGuyBill Thank you!!!!!!!!!

Since TP didn't purchase the home, any need to add mother's cost basis, or can I leave the purchase price blank on the adjusted basis worksheet?

After entry of the selling expenses to include the mortgage payoff, the Home Sale Worksheet reconciles to the Settlement Statement exactly.

Because the sales price is reduced by the gift of equity, should I include a supporting statement as explanation since the 1099 was reported to the IRS with a different amount. Or am I being overly cautious? 

[BobKamman]

Isn't the basis, at least the amount of the mortgage on the property when it was gifted?  Especially, since you seem to think the actual basis was less than that.  

Report what's on the 1099-S, for proceeds.  If the T/P walked away with $15,529, make sure he pays tax on that much.  

[Love2Cruise]

Well yes, that worked too. 

I entered the sales proceeds as $100K; basis as $46,522; adjustment to basis $326; selling expenses as $37,949 (gift of equity and closing costs) and voila! Still the same gain of $15,203. No need for additional statements and everything is reported. 

@BobKamman @TaxGuyBill @Norman2001  You guys ROCK!!!!! #teamProSeriescommunity!!!

As head numbing as this can be at times, each year I gain more knowledge. And you all are a intricate part of it! 

Thank you soooo much for guiding me through this!!!

[BobKamman]

Of course this has the scent of money laundering all over it.  How much time elapsed from "gift" by Mom, to "gift" to nephew?  I'm not sure I would want to get involved if someone walked into my office with this situation. But for a long-time client with reasonable explanation, it might be all in a day's work.  

[Love2Cruise]

He's a very long time client. His mother is very elderly and wanted to give it to her children. No one wanted it as they didn't want to be burdened with the upkeep and taxes. So she deeded it to him and his wife. When the nephew approached him about buying it as a first time buyer home, he was all to eager to help which is why he gifted the equity. All to keep it in the family! 😄

[BobKamman]

So the nephew is from the wife's side of the family?

And mom probably wanted to give away the house so the taxpayers could cover her nursing-home costs.  That makes sense.  I guess.  

[Love2Cruise]

No, he's the TP's nephew. And TP is taking care of the mother, so no need for a nursing home thus far. It's all good. They're salt of the earth good people. Downhome country folks!  

[BobKamman]

And the mother is still living in the home?  I would have called it "substance over form," put it on her return.  Sort of obvious what the strategy was.