Gift of equity

[Huy Nguyen]

Hello group! im new here and this is my first post! 

I have a question in regards to gift or equity.

My parents have a house they wanna get out of a payment. 
They owe 68k, it does need some work, I’m willing to put in the work to bring the value up if I can get it back on the gift, it should be worth about 200k, the house next door sold for 225k.

How does gift of equity work? I don’t want to buy it at market price. 

Thanks!

[Dustin Tucker]

Hello Huy,

I found this great article that might help you.

https://elderlawms.com/faq/do-gifts-of-property-to-children-...

Also, you might want to consider taking over the property sooner rather than later, if you take over the property now it appears that you would be avoiding Inheritance taxes.  Also, if you pay your parents any profit for the property, if it is their primary residence, I believe that a married couple has up to $500,000 exemption on profit from a primary residence, I'm not 100% sure on that, but you can search for that pretty quick.

If you are looking for any loans, please let me know.

[Bill B.]

Your basis will be what you pay them for it. So you’ll owe taxes on any amount you sell over $68k minus capex. They can sell tax free (assuming it’s their primary home). Assuming you love your parents, and aren’t trying to profit off them. Fix it, still in their name, have them sell it tax free, and reimburse you for the cost of fixing it up. Maybe give you a gift of some of the additional gain. Thereby keeping the government’s hand off your family’s money. 

If it’s not their primary, that’s still how I would handle it as they’re going to owe depreciation recapture even if the IRS lets them out of the capital gains. (I don’t know if the would, talk to your CPA.) but as stated above, you will then owe those taxes. 

[Tanner Bellamy]

If the property is gifted to you, they will also give you the property with their basis. So just as Bill said above, you will pay capital gains on any amount you sell over their basis. Their basis is now what they owe on the property. It will be what they purchased it for plus any improvements they have done to it. 

Assuming it is their personal residence for 2 of the last 5, the best thing would be to sell it from their name. That way they can take advantage of the $500k personal residence exclusion. So having some kind of agreement with them that you take profit or get paid however you see fit would be best here. 

[Ashish Acharya]

A gift of equity allows your parents to sell their house to you for less than market value, with the difference counting as a gift. But you should NOT be doing this. Instead, you should inherit the property in order to benefit from a step-up basis. This approach helps to avoid being taxed on appreciation and allows for higher depreciation in the future.

[Basit Siddiqi]

If the property is gifted to you, your basis will be what their basis is.

Their basis is likely their purchase price + improvements - depreciation taken.

Best of luck.