I am selling my house to my mother.?

Question

I am selling my house to my Mom. I am selling it to her well below market value. The selling price is 50,000 but the banker would like to make the selling price 74000, and show it as me gifting her 24000 for a down payment. My question is am i then going to be stuck paying the captial gains tax on that extra money? Or well the fact that it is a gift make it not taxable as capital gains.

Thanks

The house is not my principal residence. The idea behind the 74,000 is the extra money would show as a downpayment for my mother and lower her interest rate. The other idea is that selling well below market value hurts other homeowners in the area.

Answer 1

Assuming it is your pinciple residence you would only pay tax on a gain of more than $250,00 if you have lived there for two or more years

Answer 2

I'm no financial expert, but I'm trying to figure out how anyone (besides maybe the banker!) benefits by you inflating the sales price on paper. I think your Mom, you, or maybe both will get stuck with some extra taxes this way (capital gains, gift tax), because I think the limit on non-taxable gifts is $10K per year per person. Closing costs are usually based on percentage of the sales price, so that means the closing costs would be more (that's where I think the banker may be coming from). Also, depending on what state you live in, and how private you are able to keep the sale, real estate tax appraisal values from which they base property taxes are often determined from the market price of a property if it has been recently sold. I would think in order to help your mom you would want them to have the actual price you sold it to her. The only drawback I can possibly see is if she were to need to put it back on the market or for insurance purposes they might haggle with her a bit about value, but an appraisal showing that it is worth more should fix that.

I guess it's possible that somehow it would look better on your financial statement to have sold the house for more money, but if you are in a position to be selling your house to your Mom this cheap, I'm thinking that may not be a big concern for you at this point.

You may want to shop banks or mortgage brokers or just threaten to and state very plainly how you want the deal to be done. If you can't get this banker to write up the deal according to your wishes, take your business elsewhere.

Answer 3

If the source of the downpayment was honestly disclosed to the lender, in fact that the seller inflated the selling price of the house, and then gifted the difference (a phantom transaction) to the buyer, do you think an honest lender would allow that to be considered as a downpayment? This sounds like a sham to me, and I would not want to deal with a banker who suggested this.

Is this in fact the banker, or the real estate agent or mortgage broker? A higher selling price benefits these people in terms of commissions.

Anyway, as far as taxes go, you are correct. If you are going to owe capital gains tax on the house when you sell it, and the price is inflated by $24,000, then you are going to owe additional capital gains taxes of several thousand dollars. You cannot escape the capital gains taxes by saying you gave your mother $24,000 and raised the price of the house you were selling her by that same amount.

Have your mother apply for a loan. If the house is actually worth $74,000 and you are selling it to her for $50,000, and she is at all creditworthy, she should be able to finance the mortgage.

Any difference between the market value of the home and the price your are selling it to your mother for will be a gift from you. You may be required to file a gift tax return, but you will not owe any gift tax unless you have already given away $1 million already.

Answer 4

Since the selling price is $74,000, you would pay tax on whatever gain that price generates. That you choose to give part of your proceeds to your mom doesn't change the gain. And, since you'd be gifting her so much, you'd also have to file a gift tax return. Talk to your tax professional, not just your banker.

Answer 5

You are selling to a related party. From the IRS point of view, you cannot sell for below the market value because the difference is a gift.

There ought to be some appraisals floating around to justify the market value.

Answer 6

In the tax year of 2007, every person can gift $12,000 to any person and not pay gift taxes. Are you married? Does you spouse wish to gift $12,000 to your mother?

A gift tax return must be filed when you give over $12,000.

What will your mother do with the property when she receives it? It might be helpful to know to try and accomplish whatever that goal might be.

Answer 7

I would ask the banker why he wants you to do that.
I know that if the selling price is 74000, then your mother will have to pay property taxes at that level. If the selling price is 50,000 then she may be able to get away with paying lower property taxes. Also any "gift" over $10,000 is taxable.

Answer 8

You should talk to your accountant as the answer would be yes. Besides, you are only allowed to give family members a gift of $10,000. Besides, I trust bankers as much as I do attorneys. Ours "forgot" to take the taxes out of money drawn out of my mother's mutual funds for the IRS. Guess what? Four years later the IRS is contacting my mom with a tax payment in the amount of $25,000 for a withdrawal of only $6495 for a home improvement loan. Always talk to an accountant because bankers are not allowed to give you tax advice.

I totally agree with "countryguyhfc." There is something that could cause you a big penalty in your taxes and/or you mother's.

Answer 9

if its anything like buying a car then i would say not every car i have bought i talked the seller into saying it was a gift so i wouldnt have to pay taxes on it but you may want to consult a private broker or banker or even a tax agent about it, just for a second opnion

Answer 10

Parents can gift children 10,000 per year with no capital gains. Children can't gift parents, in California anyway. The best way to do this is have your mother sell the house, she won't encounter capital gains, then have her give you 10k per year. If she gives you the whole shot at once you will pay regular tax on the money,it will become income on top of whatever you made that year, less the 10k gift. This will probably come in at around 30%, I am guessing on that.