Is there any tax penalty or liability for selling a home to a relative for less then market value?

Question

My Mom purchased a home in N.J. for about $80,000 10 years ago.Since then she has refinaced it with a home equity loan and currently owes $69,000 left on that loan.She wants to sell the home to me for whats left on the loan as a cash out refinance loan which would put the house in my name. The question is or questions are is there any type of gift penalty to me since the actual market price of the house is $180,000,and how might the IRS view this if at all, as a capital loss(since its being sold for less the it was originaly paid for) or as something else since it could be sold for more. Any thoughts or advice is this would be greatly appreciated.

Answer 1

Tax consequences of you buying the house:

1. Your basis in the house is your mother's basis of $80K. If you sold the house for $180K, you would owe taxes on $100K unless you lived in the house as your main home for two years. If you eventually sell the house and it has appreciated more, you could owe tax on the sale even with the exclusion of $250K for unmarried taxpayers ($500K for married).

2. Your mother will have given you a gift of $101K. This reduces her lifetime gift exclusion of $675K. If she has other assets, this may impact her ability to give more of her assets without paying gift tax.

3. Since your mother is selling the house for less than she paid for it, she does not have a gain. Her loss on the sale is not deductible.

Answer 2

You wouldn't have any Gift Tax to pay, but your mother certainly could. The difference between the sales price and fair market value is a gift for Gift Tax purposes. Gift Tax is always assessed on the donor, not the recipient.

There is an annual Gift Tax exclusion amount of $12,000. There is also a unified lifetime exclusion amount as part of her estate that she could use but this would reduce the exclusion available to her estate when she passes. If her estate is minimal, this may not be a matter of concern but if her estate is significant it could be important. With the current uncertain future of the estate tax, this could be a real problem is she should die at the "wrong" time.

She should consult with a CPA or tax attorney to make sure that the deal is structured properly and the required Gift Tax returns are filed.

Willing the house to you might be a better bet. She could sell you an undivided partial interest in the home now and leave the balance to you in her will. That way you'd get the stepped up basis on her share when she dies. There would be no gift tax consequences now either. Do NOT put the property in an irrevocable trust. That bypasses the estate and you won't get the stepped up basis on her death.

Answer 3

Since this is not what is deemed as an "arm's length transaction" (parties are related), yo would be receiving a gift of the difference between the fair market value of the home and what you are paying for it. Your mother would have to file a gift tax form with the IRS...might be no taxes due now, but would go against her lifetime deduction at the time of her death, at which time there could be additional estate taxes due because of the "gift". There would be no capital loss for her. You would also lose the "stepped up basis" that you would get if you simply inherited the home. Have you considered placing it in an irrevocable trust?

Answer 4

The difference between the market value and the sales price is considered a gift to you. Your mom would have to file a gift tax return. Chances are, no gift tax would be owed but the return must be filed.