How do we hadle this situation for tax purposes?
Good afternoon,
The situation is this; my three siblings and I inherited my mother's house last year, which she owned out right. A decision was made to sell their share of the house to me for $1, as recorded on the deed (the actual value is approx $425K). In return, I am taking equity from the house and paying them each $100K.
My questions are these, how do we handle this transaction for tax purposes? Should/can my siblings write-off their shares of the house as a gift to me, say, $10K over the next ten years, or the entire amount at once? Also, can I somehow treat the $300K I am paying to them as a gift? If not, what do you advice?
I have always preparing all our own taxes before, tax law was my minor in college, but is it time now to hire a pro or can I handle this on my own?
Thank you for your responses.
2 Answers from Attorneys
Re: How do we hadle this situation for tax purposes?
If the house was inherited, it would have a fair market basis for future resale purposes. If an interest is gifted, the donee takes the donor's basis. The gift has to be reported if it is over $11,000 per donee. You could sign a note that could be self-discharging by which the note is discharged in the amount of $11,000/year. However, if you re-gift the amount back, it negates the concept of a gift and could be considered the equivalent of a sale. However, since the sales price is the same as the basis, there is no profit or loss on the transaction. However, since no interest is involved, there could be a taxable element equivalent to the interest component under the theory of imputed interest, calculated at a rate for imputed interest.
Re: How do we hadle this situation for tax purposes?
Some of your figures don't jibe. As I understand it you plan to purchase from each sibling a 1/3rd interest in the house for $100,000 each (or is it $150,000 each?).
The sale of the 1/3rd interest should be at fair market value (1/3 of $425,000). If the price, that is the value transferred, is less than fair market value there is a gift.
Keep it simple and direct.
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