buying a family home from father in US - gift of

My_question_is: US-specific
Subject:        buying a family home
Expert:         taxman at centa.com
Date:           Wednesday October 19, 2005
Time:           10:30 AM -0700
QUESTION:
my husband and me purchased our home two years ago from my father. we "owner
financed" the home. the paperwork was not even filed, the idea behind it
being after we paid for the home, he would "donate" it to us, thus avoiding
having to pay taxes on the income recieved from selling the home to us. now
we are on non speaking terms and he wants us to go to the bank to get the
loan thru them. basically as it looks now, the house belongs to my dad and
we have been paying rent...unless the house sell papers get filed, which he
doesn't want to happen. he wants to take the balance of the note ($96K) and
just go to the bank and say we are buying the house for $96K. however the
value on the home is $150K. we talked to the bank and they said we should
ask my dad to do a "gift of equity" for the difference between the $150 and
the $96. what is a "gift of equity" and how would that affect my dad with
the payment of taxes on the profit of selling the home? i know he will try
to avoid any paying of any profits so we will have to almost force his hand
to get what is best for us out of this deal. in reality, we know that it is
still in his name and he could refuse to "sell" it to us if the terms don't
benefit him. do you have any suggestions or tips on how to go about this?
thanks,
----------------------------------------------
david ingram replies:
A gift of equity is the forgiving of the $54,000 difference.  He can only
give you $11,000 a year each without incurring gift tax however, so a
logical method would be for him to forgive $22,000 now or before the New
year and another $22,000 in January and then he can forgive the other
$10,000 a year form now.
However, whether there was paperwork done or not, if your father agreed to
sell it to you two years ago, the sale today or the transfer should take
place at that price, not today's price.
This would cut down on any capital gains tax your father might owe on the
sale and would mean there was not as much to worry about for the gift of
equity part.  All sorts of people "sell" something to a friend or relative
and get the money much later. The fact that no paperwork was done does not
mean that the sale did not take place.
Make peace with dad and figure out the extra tax on the difference and pay
dad MORE for the house.  You have twenty five or thirty years to make up the
difference and it will keep peace in the family.
Good luck!!
david ingram
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