A gift of equity is when someone sells you something for less than full market value. What tax implications does a gift of equity have? We can explain that using an example.
Let’s say your grandmother sells you her house for the price she paid 40 years ago. Currently, the value of the house is worth several thousand dollars more. In this situation, she is giving you a gift of equity.
Gift of Equity: Tax Rules
In the gift of equity example above, you’ll have no immediate tax impact. However, you’ll need to know the basis of the property for any future transactions. The basis of the property will be the greater of these:
- How much you paid for the property
- The seller’s adjusted basis of the property at the time of the transfer
This amount goes up by how much gift tax the seller has to pay, if any.
You should treat the purchase as if they gave you cash to pay them for the difference between what you actually paid and the home’s fair market value (FMV). This difference is the gift they gave to you. Gifts of equity, like other gifts, aren’t taxable to the recipient.
The seller might have to file a gift return. They’re allowed to give $15,000 per person each year without having to file a gift return. So, if the gift of equity they gave you is less than $30,000, they don’t have to file the return. If it’s more than that, they’ll have to file the gift return, but they still might not have to pay gift tax.
Have more questions about gift of equity tax rules? Visit one of our tax offices where one of our knowledgeable tax pros can assist you.
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