Down payment gift

[Gerald Williams]

I'm trying to purchase a property from my daughter creatively for what she owes on the mortgage. Which is 184k.  Zillow estimated it 215k.  I want to use her equity as a gift for the down payment to avoid capital gain taxes. How is this process done?

[Tim Delaney]

If I'm understanding you correctly you only want to actually buy the house for $184K, but you want to use a gift of equity from your daughter as the down payment. One option rather than doing that could be Subject To - in which you buy the house for $184K subject to the existing mortgage. Her sale price would be $184K so depending on her basis she may not owe any capital gains. You would just take over payments on her existing mortgage.

Another option is you write the contract for the $215K that Zillow estimates and you tell your bank that the $31K down payment is coming from a gift of equity. That is only 14%, so they may still want you to put more down. You will also need to talk to a CPA to make sure you won't owe income tax on that $31K. Depending on what your daughter paid she may also owe capital gains because now she is selling the house for $215 instead of $184.

Subject to is probably a better bet for you.

[Katie Ripp]

Your daughter can gift you the $31,000 equity by selling the house to you at a below fair market value price. She may need to file a gift tax return for the $31,000 gift depending on other factors. Generally speaking, as long as your daughter has not reached the $13M lifetime gift limit, the gift won't be subject to gift tax.

You would want to get a qualified appraisal for the the fair market value at the time of gift/sale, Zillow is not the most reliable :-)

[Gerald Williams]

Thank you Tim and Katie I appreciate both of you for great replies and excellent strategies. I did forget to mention that I have a holding company and an LLC. I thought about buying it Subto, but she bought in 2022 at the height of the real estate market so the monthly payment is too high for this areas rental market. That's why I wanted to use the equity and then only owe the $153k to lower the payment and refinance later. By having the holding company I was hoping to avoid capital gain tax. If that makes sense.