Are gifts a taxable event?


B

Brian Gordon

We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
 
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P

Phil Marti

Brian Gordon said:
We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
You treat the sale on your 1040 as you would a sale to a
stranger, unless it results in a capital loss. See
Publication 550.

You also have a gift tax filing requirement. Whether you
actually have to pay gift tax or not depends on your
lifetime taxable gifts. See Form 709.

No tax effect on your son.
 
P

Paul A Thomas

Brian Gordon said:
We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
It sounds like you made a gift in the amount of the
difference between the sales price and fair market value.

You would be responsible for filing a gift tax return,
although it's highly likely that you'll not owe any gift
tax.
 
T

Thomas Healy

Brian Gordon said:
We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
You'll need to file a gift tax return for the amount of the
gift sale less the annual exclusion ($22,000 unless S is
married, in which case the gift could be doubled). That will
eat into your lifetime gifts of $1,000,000. So unless
you've done previous taxable gifts, no obligation other than
the return. If the house was a rental property, you'll have
to recapture depreciation up to the amount of the actual
sale price.
 
R

Rich Carreiro

We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
Definitely not for him.

But there's a very strong argument that you should be
treated exactly the same as if you:
(a) sold the house for full fair market value, and
(b) made a $150K cash gift to your son

So you would have to compute the gain/loss on the sale of
your house as if you sold it for what it was really worth,
and you need to file a gift tax return (though you won't
actually pay any gift tax at this time).
 
B

Benjamin Yazersky CPA

Brian Gordon said:
We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
are you inquiring about income or gift taxes? probably not
an income tax issue probably is a gift tax issue so, go see
your CPA promptly
 
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P

Phil Marti

Rich Carreiro said:
But there's a very strong argument that you should be
treated exactly the same as if you:
(a) sold the house for full fair market value, and
(b) made a $150K cash gift to your son
What is that argument? It seems to me that the sale is what
the sale is, and the difference between FMV and the sale
price is the gift. Why would they have to consider FMV as
the sale price AND calculate the gift aspect?
 
R

Rick Merrill

Brian said:
We sold our son a house at less than market value (about
$150K less). Is that amount a taxable event for either of
us?
Yes: you have (probably) a capital gain on the house, but it
depends on the actual amount. There is no gift tax because
the IRS doesn't know what the market value is, do they?
 
S

Stuart A. Bronstein

What is that argument? It seems to me that the sale is what
the sale is, and the difference between FMV and the sale
price is the gift. Why would they have to consider FMV as
the sale price AND calculate the gift aspect?
Whenever you can have taxable income but choose not to
(unless subject to a specific exclusion or deduction) you
will generally be required to recognize the income when you
could have had it, even if you didn't.

It's the IRS's way to make sure that they get what they are
entitled to.

Stu
 
S

Seth Breidbart

We sold our son a house at less than market value (about
Yes: you have (probably) a capital gain on the house, but it
depends on the actual amount. There is no gift tax because
the IRS doesn't know what the market value is, do they?
Taxes don't depend on the IRS knowing underlying facts,
unless you want to risk a lot of money (or your freedom). I
wouldn't be surprised if an IRS agent read this newsgroup.

Seth
 
P

Phil Marti

Rick Merrill said:
Yes: you have (probably) a capital gain on the house, but it
depends on the actual amount. There is no gift tax because
the IRS doesn't know what the market value is, do they?
I'm not sure how this one got past the moderator, but for
OP's consideration, this response advises fraud. Whether
the IRS can catch you or not is not a determining factor in
applying the law.
 
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S

Seth Breidbart

Whenever you can have taxable income but choose not to
(unless subject to a specific exclusion or deduction) you
will generally be required to recognize the income when you
could have had it, even if you didn't.
But it's clear that if he just gives the house to his son,
there's no income tax due.

Now suppose the house is worth $600K, and he sold it to his
son for $450K. His basis is $300K.

Someone might claim that he gifted 1/4 of the house to his
son, and sold 3/4 for FMV. He's have a gain of $225K, and
his son would have a basis of $525K.

And I'll completely disagree on the "could have had".

I bought a painting for $100. It's now worth $20,000. I
could have had that income; but I chose to keep the painting
instead. Nothing is taxable. (But you might argue that I
can still have the income in the future.)

After her divorce, a woman threw her wedding ring into the
river. She could have had income from selling it instead.
Now she can't have future income from it, but there's still
no taxable event.

Seth
 
S

Stuart A. Bronstein

But it's clear that if he just gives the house to his son,
there's no income tax due.
Because the son takes the same basis as the father, so the
tax will be paid when he sells it.
Now suppose the house is worth $600K, and he sold it to his
son for $450K. His basis is $300K.

Someone might claim that he gifted 1/4 of the house to his
son, and sold 3/4 for FMV. He's have a gain of $225K, and
his son would have a basis of $525K.
Interesting analysis. In that case father may not have to
recognize taxable income.
And I'll completely disagree on the "could have had".
Sure, when you apply it to situations the code explicitly
states that no income is recognized (when you have an asset
and do not sell or otherwise transfer ownership).

Stu
 
D

D. Stussy

What is that argument? It seems to me that the sale is what
the sale is, and the difference between FMV and the sale
price is the gift. Why would they have to consider FMV as
the sale price AND calculate the gift aspect?
Maybe that's a convoluted way of thinking of this: There's
an amount actually paid, plus a gift made (and potentially
gift tax). Therefore, the basis is the SUM of the FMV of
the gift + gift tax (if any) + amounts actually paid. Since
the gift portion is computed as FMV less actual sales price,
it seems to me that it all still equates to a basis equal to
FMV (plus any gift tax). Therefore, Mr. Carreiro's
conclusion seems correct - even if he arrived at it a
different way: The basis is FMV, and the amount of the gift
is $150k.
 
R

Rick Merrill

Maybe that's a convoluted way of thinking of this: There's
an amount actually paid, plus a gift made (and potentially
gift tax).
That sounds reasonable, except that the "gift" exists ONLY
in the minds of the participants. There is no external
evidence of said "gift". There is no check with the gift
amount. There is no receipt saying "gift" or "gratuity".
Hence there was no gift, just a good transaction.

Rick
Merrill
 
P

Phil Marti

Maybe that's a convoluted way of thinking of this: There's
That sounds reasonable, except that the "gift" exists ONLY
in the minds of the participants. There is no external
evidence of said "gift". There is no check with the gift
amount. There is no receipt saying "gift" or "gratuity".
Hence there was no gift, just a good transaction.
Twaddle. Economic reality, which can be considered in the
enforcement of tax law, says that if it walks and quacks
like one it is one. A sale to a family member for $150K
under FMV clearly has a gift aspect even if they call it
barking at the moon.
 
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S

Stuart A. Bronstein

That sounds reasonable, except that the "gift" exists ONLY
in the minds of the participants. There is no external
evidence of said "gift". There is no check with the gift
amount. There is no receipt saying "gift" or "gratuity".
Hence there was no gift, just a good transaction.
If it's an arm-length transaction, you're right. But if
it's between family members, there are ways to determine
fair market value. And if the sale price is below that, the
difference is a taxable gift.

Stu
 
R

Rick Merrill

Maybe that's a convoluted way of thinking of this: There's
Twaddle. Economic reality, which can be considered in the
enforcement of tax law, says that if it walks and quacks
like one it is one. A sale to a family member for $150K
under FMV clearly has a gift aspect even if they call it
barking at the moon.
Keep howling: a 10% "gift" is not going to set off alarms.
You can't quote an IRS publication that says "walks and quacks".
I think your bark is is worse that your bite.
 
S

Stuart A. Bronstein

Twaddle. Economic reality, which can be considered in the
Keep howling: a 10% "gift" is not going to set off alarms.
You can't quote an IRS publication that says "walks and quacks".
I think your bark is is worse that your bite.
So it's ok to cheat as long as it's so small that you're
unlikely to get caught?

Stu
 
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S

Seth Breidbart

Twaddle. Economic reality, which can be considered in the
Keep howling: a 10% "gift" is not going to set off alarms.
You can't quote an IRS publication that says "walks and quacks".
I think your bark is is worse that your bite.
I can find court rulings about "form over substance".

And the issue isn't whether you'll get caught, but whether
something is actually illegal. (If the son tries claiming
the lower price as a basis for real estate taxes, he could
get in trouble.)

On the other hand, for a $2 million property, selling to a
family member at a $150K discount is a reasonable
transaction, with no gift involved: you save the real estate
agent's commission off the top, do the sale immediately
instead of at some unknown future time (and unknown
negotiated discount), etc.

But for a $500,000 property, a 30% discount is a lot harder
to justify without a gift being involved.

Seth
 

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