Gift taxes on selling real estate buyout?

My X-spouse and I divorced three years ago. As our grandchild was occupying a rental we owned, the judge agreed that we could keep the property tenants in common 50/50 until the child finished college. Now it is time to sell the property. “A” wants to buyout “B”. Because “A” will allow the child to continue living there, “B” is willing to sell his 50% at less than appraised value. No mortgage. Cash buyout. The question has to do with gift tax. If the buyout is less than appraisal value, will either party have to pay gift tax? And if so, which party? I have gotten different answers from different lawyers. If they were related, “B” cannot sell to “A” for a value less than 25% of what he should be getting. But we are not related anymore. So the question is, can “B” sell to x-spouse at 30% less than what he would have paid based on 50/50. For example. The appraised value is 200k. Each owns 100k. If “B” would usually want to sell to “A” for 100k. And if they were related, “B” would not be allowed to sell for less than 75k (given the 25% rule). But “B” will willing to sell for 50k given the transaction will be cash and because of the future use of the rental. “B” will pay tax on that amount. Will there be any gifting involved since the amount will be 50k instead of 100k and if so, is “A” or “B” responsible for paying the gift tax?

Note: The question is not concerned with “A” being stuck with paying additional capital gains after the buyout.

5 Answers

  • 8 months ago

    Yes and no.

    Yes - In this example, B is gifting A with $50k of value.

    No - B does not pay gift tax. B must FILE a gift tax return, because the value of the gift exceeds the $15,000 annual amount where filing is required. B may never owe a penny of gift tax

    Those gift tax returns you file are totaled up when you die and subtracted from your lifetime estate exemption, which is currently about $5.5 million. Most people never come close to that, and so, never pay any gift tax or estate tax.

    As for whatever tax issues A might face, that would take a tax expert to investigate.

  • 8 months ago

    The sales price CAN be what ever both parties agree to.

    That is ENTIRELY separate from if the IRS will consider the difference from appraised value as a gift. Assuming the entire $50,000 difference is considered an gift, the person buying the other out would be required to complete a gift tax return, but not necessarily own gift taxes. There is a significant 'lifetime exemption that would have to be used up before gift taxes were actually owed. $50,000 by itself doesn't come close to that amount.

  • Anonymous
    8 months ago

    The seller is the one making the gift and if the gift of equity is more than $15,000 (including any other gifts that year), is the one who files the 709.

    Another poster has explained how to gift more $ over several years, but a gift loan must include interest, which is taxable to giver.

    As for those lawyers, they know zip about tax rules and when gift tax is actually paid.  Get appraisals; don't use tax rolls.

  • A.J.
    Lv 7
    8 months ago

    Although you should be discussing it with a tax accountant, one possible is it can be transferred with a partial lien (mortgage) at 3% a year on the declining balance which would be income, but there is a $15,000 per person exclusion from gift tax.

    If "A" will not need a mortgage to pay $50K up-front, and you trust your ex for a year or so, there could be a mortgage tax and income tax on the interest on about a year.

    It could be much cheaper than a gift tax.If either is married, the number doubles. Each can give and receive $15,000 a year.

    You can work out a $78K transfer price with a $28,000 mortgage, $50,000 cash.

    Payments April, July, October, balloon payment January 2021

    $4700 Principal x 3, $13,900 January 2021

    It's about $700 in total interest, tax on that is less than 1/3

    Principal and interest gifted back legally, maybe minus income taxes on interest and mortgage tax stamp on the $28K.

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  • 8 months ago

    This is not the place to ask that type of question unless an answer give its source. See a lawyer.

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