Sale of Rental property with gift equity

[kabbabkkg]

I have a client who has sold a rental property that was never rented and sold it to his son.  The Basis of property is 125,560, sale price is 180,000.  There were 40,000 in upgrades and repairs to property and the taxpayer used a gift equity of 28,000 at the time of the sale.

The 40,000 is added to the basis to increase the basis correct?  The gift equity is the amount of a discount on the sale price and reduce the sales price of the property?  The only other cost is closing costs paid by the seller.

I have been researching this and I just need to know that I am in the right thought process for this return.

thanks

[BobKamman · Accepted solution]

I would add the gift to selling costs, which on the form comes out looking like another addition to basis, so that the selling price matches what is shown on the 1099-S.

[jeffmcpa2010]

Let me ask a question to get discussion started.(And to give myself something to cogitate on)

If the Seller gifted the son, $28,000 cash, which the Son paid back as part of the purchase price, what would the sale reporting look like?

Is Transferring the Cash any different than gifting of Equity?

[TaxGuyBill]

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@kabbabkkg wrote:

I have a client who has sold a rental property that was never rented

The 40,000 is added to the basis to increase the basis correct? 

The gift equity is the amount of a discount on the sale price and reduce the sales price of the property? 

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Huh?

Yes.

Yes, but as was mentioned, if there is a 1099-S you may want to shift that amount to selling costs or Basis to avoid an IRS notice.

[BobKamman]

@jeffmcpa2010  "Is Transferring the Cash any different than gifting of Equity?"

In the eyes of the mortgage company it is, and they're the only ones who count.  

[jeffmcpa2010]

In the eyes of the mortgage company it is, and they're the only ones who count.  

Them and the IRS.....

[BobKamman]

Which suggests the question -- if the kid rents out the property, what is his basis for depreciation?  $180K, or $158K?  If it were a total gift, he would take the parents' basis. So maybe there is some pro-ration required? Or maybe a side agreement, the land is the gift, the building he paid for 100%.  

[TaxGuyBill]

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@BobKamman wrote:

Which suggests the question -- if the kid rents out the property, what is his basis for depreciation?  $180K, or $158K? 

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https://www.law.cornell.edu/cfr/text/26/1.1015-4

[BobKamman]

That looks complicated.  If I get one of those I'll send them to you.  

[kabbabkkg]

The son is living in the home

thanks