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 $100KAt closing, proceeds were distributed to seller (TP) as follows:Mortgage pay off (still in mother's name) - $46,522Seller credit - $700Closing Costs - $735Taxes - $18Gift of equity - $36,496Net 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!

Level 5

Question

Sale of (free) home with gift of equity

Forum|Forum|2 years ago
March 24, 2024
3 replies
24 views

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!

ProSeries Basic

This topic has been closed for replies.

N

Norman2001

Level 6

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.

L

Love2CruiseAuthor

Level 5

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?

T

TaxGuyBill

Level 15

@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).

L

Love2CruiseAuthor

Level 5

@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

Level 15

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.

BobKamman

Level 15

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.

L

Love2CruiseAuthor

Level 5

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

Level 15

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.

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