Hi all, if anyone would be willing to offer advice on this situation, it would be greatly appreciated! Going to provide as much detail as possible that seems relevant.
My parents purchased a home in 2022 for $200k that I have been occupying and renting from them ever since. They have reported the rental income and depreciation/expenses on their taxes for all years. I am looking to purchase the home from them, with the following terms:
Purchase Price / FMV: $250k
Loan Amount: $190k (balance of their mortgage)
Gift of Equity: $60k (covers my down payment and all closing costs)
My Mortgage: $190k for 10-year term
My question pertains to the tax implications of this arrangement, for both my parents and I, where gift equity taxes and capital gains are concerned.
My understanding of gift equity is that $19k per year can be excluded altogether, and anything over and above that must be reported on tax form 709, which is then applied to the lifetime gift exclusion of $15mil, meaning no taxes would be owed on the gift equity. Can you confirm this is correct? *Also, would the gift of equity exclusion be $19k total, or $19k per parent (one of them is a stepparent, if that matters) to me (single, no dependents).
When it comes to capital gains, this is the area I am unclear on. What are the tax ramifications where this is concerned, and how can we avoid giving the IRS any money?
Finally, are there any other tax implications we are not considering here?
One last question …. For the tax years 2022-2025 where my parents reported rental income and depreciation/expenses on my home, they reported the following (net after dep/exp) income on Schedule E of Form 1040. If I want to make them “whole” again from a prior tax perspective, what percentage should I reimburse them for the total income reported of $1,481?
2022 = 0
2023 = 0
2024 = $209
2025 = $1272
TOTAL = $1,481
Thanks so much!
Gift Equity and Capital Gains Tax Question
byu/MMHaddonfield1978 intax
Posted by MMHaddonfield1978
2 Comments
Putting aside your questions about gifting and basis for a second, can you clarify what you mean by the reported rental income on your parents’ returns?
Was that net income on Sch E after expenses and depreciation, or did they really only report a total of $1481 rental income from you over those four years?
If that’s the only income they reported, they have an issue they need to correct since it’s obvious they weren’t charging market rent and that impacts what they would’ve been able to claim as expenses.
You are mostly correct on the gift portion. The total $60k gift is reported on Form 709, likely split between parents. Each gets a $19 exclusion and the balance reduces their lifetime exclusion. Neither they nor you have any tax.
How much depreciation was claimed on the home total for the 4 years rented. That amount is recaptured and taxed at ordinary rates.
Also need to know their cost basis in the property.