sale of a house between family members

Discussion in 'General Real Estate and Real Estate Finance' started by sts7049, Jan 27, 2009.

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  1. sts7049

    sts7049 New Member

    0
    Jan 26, 2009
    Professional Status:
    General Public
    State:
    Texas
    ok, so i'm having a hard time finding answers to this question - hopefully you guys can help.

    in a situation where the buyer and seller are related, what are the restrictions on what sale price can be set for a home? say the house is appraised for 190k, and the seller is willing to sell for 150k. is this possible to do without causing interest from the IRS?

    my basic understanding is that if the house is sold below FMV, that the difference between the sale price and market price can be considered a gift. i also understand that a person can gift up to 12k per year, so in this case if the seller was a married couple, and the buyer was a married couple, could in this situation the house be priced up to 48k below market value without it being considered a gift?

    this is in texas if it matters. thanks in advance!
     
  2. Randolph Kinney

    Randolph Kinney Elite Member

    7
    Apr 7, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    With out addressing your real question, which is entirely an income tax question better answered by a CPA, the market value is $190,000 if that is factual.

    I have appraised several properties where the seller gifted any equity to the buyer that is created by the appraised value over the agreed upon selling price. This is common on non-market sales where the seller did not seek out any and all buyers to test the selling price and the parties are related or have a common interest. The terms and condition of sale are spelled out in the purchase agreement. Lenders will finance only on the purchase price and whatever down payment that they require.

    Now how does the instant equity get reported to the IRS? Does the lender do this? If it is dependent on either the seller or the buyer to file the appropriate forms, it may not happen.
     
  3. Walter Kirk

    Walter Kirk Senior Member

    3
    Jun 24, 2003
    Professional Status:
    Licensed Appraiser
    State:
    New Jersey
    It could result in gift tax liability but how would the IRS learn about it?
     
  4. sts7049

    sts7049 New Member

    0
    Jan 26, 2009
    Professional Status:
    General Public
    State:
    Texas
    well, see, i don't really know the answer to that.

    if the buyer pays 150k in this scenario, and immediately gains the equity - surely that has to be reported come tax time? i'm not a home owner, so i don't know how that works myself.
     
  5. Randolph Kinney

    Randolph Kinney Elite Member

    7
    Apr 7, 2005
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    As far as I can understand this problem of gifting equity upon the sale of a home between two related parties, the seller has the obligation to file with the IRS to declare the gift and pay the tax on it.

    You can read about gift taxes at the IRS web site.

    http://www.irs.gov/businesses/small/article/0,,id=108139,00.html#2

    Who pays the gift tax?
    The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

    What other information do I need to include with the return?
    Refer to Form 709 (PDF), 709 Instructions and Publication 950. Among other items listed:

    1. Copies of appraisals.
    2. Copies of relevant documents regarding the transfer.
    3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).


    What is "Fair Market Value?"
    Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation ยง20.2031-1.
     
  6. Lucien Hamernik

    Lucien Hamernik Sophomore Member

    0
    Mar 26, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Nebraska
    I think the OP math is wrong. The gift now is increased to 13k but is X 2 not 4.
     
  7. sts7049

    sts7049 New Member

    0
    Jan 26, 2009
    Professional Status:
    General Public
    State:
    Texas
    if the buyer and seller are both married couples, then doesn't that make it 52k (13k x 4)?
     
  8. Lee in L.A.

    Lee in L.A. Elite Member

    19
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    What do a below or even above market value sale, or tax consequences have to do with the appraisal? The value is what it is. :unsure:
     
  9. sts7049

    sts7049 New Member

    0
    Jan 26, 2009
    Professional Status:
    General Public
    State:
    Texas
    my original question isn't in regards to the appraisal. it's really about what the consequences are of setting the selling price of the house below appraised value, in this case when the buyer and seller are related.
     
  10. Lee in L.A.

    Lee in L.A. Elite Member

    19
    Jan 24, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I'm no tax specialist. Just hope I didn't overpay and get an IOU from CA State this year. Sounded like a good answer above though. :shrug:
     
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