Tax Court Determines Gain On Part Sale/Part Gift Of Residence To Parents
In Fiscalini, TC Memo 2017-163. an individual (a son) sold his personal residence to his parents after previously being gifted part of the same residence by them, as well as having them pay off outstanding mortgages as part of the sale to avoid foreclosure.
In this Tax Court case, the Court found that the taxpayer owed long-term capital gain on the sale, but not to the extent argued by the IRS.
In this situation, the parents took title to a portion of the home representing the down payment. They stepped in again, buying back the house when mortgage refinancing left their son facing foreclosure during the 2007 economic downturn.
Sorting out the nature of a gift and its tax basis and the impact of buy-back arrangements (in this case), as in any case, can sometimes raise questions with the IRS.
The taxpayer and his parents purchased a home. The parents contributed $40,000 cash and the taxpayer took out a $234,000 mortgage. A few years later, the parents gifted their share of the home to the taxpayer. Over the years, the taxpayer claimed he put $50,000 in improvements into the home. He also had refinanced his home until, at the start of the economic downturn in 2007, he found himself facing foreclosure, unable to make the mortgage payments. His parents stepped in again as purchasers, paying the taxpayer $975,000 for the property, paying off the $664,000 mortgages and by an acceptance of "a gift of equity" from the son of the $295,000 difference (less $16,751 settlement costs).
On audit, the taxpayer and the IRS disagreed over the amount of capital gain realized. They each based their arguments upon different conclusions over the taxpayer’s adjusted basis ($329,000 vs. $234,000, respectively) and the amounts realized on the sale of the property ($664,000 vs. $975,000, respectively).
The Court’s analysis
The Tax Court agreed with the taxpayer that the parent’s initial gift of the $40,000 original share of the home was basis that carried over to the taxpayer. His basis equal to the original $274,000 purchase price of the home could not be increased by his claimed $50,000 in improvements, however, since the court determined that he failed to carry his burden of proof for that amount.
The Tax Court also agreed with the taxpayer that the purchase price for determining long-term capital gain was $664,000, and not $975,000: reasoning that the gift of the difference was not made subsequent to the sale but instead was part of it, and also accepting the fact that cash did not exchange hands for that amount; instead, it was a transfer of property that was in part a sale and in part a gift.
After reducing the purchase price by the $16,751 settlement costs and excluding $250,000 of the gain under the Code Sec. 121 home-sale exclusion, the court found that the taxpayer was required to recognize $122,000 of long-term capital gain from the sale to his parents.
References: CCH Dec. 60,996(M)