sale of primary home to relative

[Tracy Lee]

TP sold their primary home of 17 years to daughter.  Basis was $520,000.00 sold for $495,000.00 and a market analysis was done to come up with that FMV of $495,000.00.  Title company paid off the original mortgage of $320,000.00 and parents gifted their daughter the $175,000.00 equity in the house.  There is a paper trail on the Settlement Statement.

I believe all I need to do is File a Form 709 reporting the gifted house equity and the house still qualifies for the maximum exclusion, is this right or am I missing something else?

[jklcpa]

Yes, a 709 is filed for the gifted portion.

There is no gain that would qualify for exclusion because it was sold for less than basis and generated a loss, and the loss is disallowed because it was sold to a related party. More on that at the end....

**ignore this part, doesn't apply to you** ---> Sec 1015(a) of the tax code places a limitation on the gifted basis so that a loss cannot be transferred by gift from donor to donee, and no one can ever deduct that portion of a loss. If and when the recipient disposes of the property and does incur a loss using the lower basis under the dual basis rule, the loss is limited to the the amount of loss beyond the reduced (dual) basis for computing the loss.  In other words, the recipient would never get the benefit of the decline in value from the original donor's cost to its lower FMV at the time of the gift, but CAN take loss beyond that once in his or her ownership. ***

I am curious how parents have basis in the home for $520K, have lived there for 17 years, and now it has a decline in value when prices have done nothing but go up significantly, especially in the last couple of years. Is the property in such disrepair that there was no increase in value in those 17 years?

Edited April 16, 2022 by jklcpa
strike section as n/a

[TexTaxToo]

11 hours ago, jklcpa said:

the loss is disallowed because it was sold to a related party.

But in this case, any loss on a personal residence would be disallowed regardless.

 

11 hours ago, jklcpa said:

In other words, the recipient would never get the benefit of the decline in value from the original donor's cost to its lower FMV at the time of the gift, but CAN take loss beyond that once in his or her ownership.

I think you mean that this would apply if the property is rented or used in a business or as an investment, not if the daughter continues to use it as a personal residence.

I am also curious about the basis, but perhaps Tracy is asking if the daughter will qualify for the maximum exclusion if she eventually sells the house after living there long enough to qualify.  If the basis is correct, I believe she will be able to use the donor's basis in figuring her gain, and can use the exclusion on top of that.

[Lee B]

We will see what happens

[jklcpa]

1 hour ago, TexTaxToo said:

But in this case, any loss on a personal residence would be disallowed regardless.

 

I think you mean that this would apply if the property is rented or used in a business or as an investment, not if the daughter continues to use it as a personal residence.

Ah, correct. I used c&p from another of my older posts. Will edit further once I get back to my desktop. Editing on a phone has some limitations and less functions for me  for this site in particular.

[Catherine]

1 hour ago, jklcpa said:

Editing on a phone has some limitations

I would never attempt it at all; you are a braver woman than I! Heck, I can't even get my auto-UNcorrect to stay shut off on my phone. Keeps turning itself back on and mucking up my text messages!

[Tracy Lee]

I just needed affirmation on the Form 709.  Thanks.  I didn't think to ask why basis was so high, my brain is fried! Maybe they bought is at the height of the market at that time? I did make sure to ask that they actually got a market analysis and sold it for FMV, which they did.  They said they could have sold it higher but chose the lowest FMV because it was for their daughter.  The daughter lives down in California and I'm a Oregon preparer so I won't need to address the daughters TR at any point.

I'm wondering....how do I respond to an individual answer like I see in these posts?

[Slippery Pencil]

On 4/16/2022 at 12:25 PM, Tracy Lee said:

They said they could have sold it higher but chose the lowest FMV because it was for their daughter. 

FMV is FMV, it's not a variety of numbers from which we choose. 

How do they know they could have sold it for more?  Did they have numerous offers from unrelated buyers at a higher price?  If so, then they didn't sell it at FMV.  If they didn't have offers but believe they could have sold it higher due to a real estate sales person's market analysis, real estate agents will say anything to a prospective client to get the listing.  Most market analyses from the typical real estate agent aren't a reliable source for FMV.

That aside, the housing market peaked around 2005, approximately 17 years ago.  The current market isn't that much higher than it was in 2005.  It's not that hard to believe someone buying at the top of the market can sell for a loss 17 years later. 

[Lee B]

That's not the case in Oregon. Here the housing market up substantially since 2005.

[Catherine]

I assumed what Tracy meant was they picked the lowest of several market analyses from realtors.  I'd still double check against Zillow (or similar) tracking systems. Those can be excellent resources - as long as it is an area with reasonable turnover from which to extrapolate averages and trends.  Had a case some years ago trying to establish basis for an estate property in a remote area where there had been no sales in the county for five years.  That wasn't fun.

[Lee B]

2 hours ago, cbslee said:

That's not the case in Oregon. Here the housing market was up substantially since 2005.

The average Oregon Home Sale Price in 2005 was $282,000

The average Oregon Home Sale Price in 2021 was $447,000

If the house was located anywhere in the Willamette Valley, the % increase would have been higher.

[Patrick Michael]

One situation I can think of where there were

On 4/15/2022 at 9:46 PM, jklcpa said:

I am curious how parents have basis in the home for $520K, have lived there for 17 years, and now it has a decline in value when prices have done nothing but go up significantly, especially in the last couple of years. Is the property in such disrepair that there was no increase in value in those 17 years?

One way this could happen comes to mind.  If there were substantial capital improvement(s) that did not add market value to the home.  We had a home owner in our area that added a new addition to their home for an indoor pool.  I doubt they could ever re-coup the cost of the addition and pool as this is middle class area of the city..