In this case, a generous couple agree to sell their home to their son. While the bank appraised the value of the property at $700,000, the couple is selling it to their son for the amount of the mortgage, which is $340,000.
According to the article “I’m selling my home to my son at a discount. Is it considered a gift?” from nj.com, the IRS will consider this transaction to be a gift.
The amount of the gift would be the excess of the value subtracted from the amount paid. In this example, if the bank-appraised value of the property is $700,000, and the parent is selling it for $340,000, the $360,000 will be treated as the amount of the gift.
The gift must be reported to the IRS on IRS Form 709 by April of the following year. However, there’s probably no gift tax due.
The gift tax is a tax on the transfer of property by one person to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.
In this case, because the value is a gift is under the available federal annual gift exclusion, when applied, that relieves the son of taxes on the gift. The federal basic exclusion amount will be applicable.
An individual can gift $15,000, adjusted for cost of living over time, to a person each year without reporting the gift. However, if the gift to a single person is more than $15,000, then IRS Form 709 must be filed to report the gift.
When reporting the gift, the value of the gift is applied against the available federal basic exclusion amount of the donor (the person making the gift). Only if the gift value is more than the available federal basic exclusion amount, is there a tax that’s due.
The current federal basic exclusion amount is $11.4 million per person.
If the property was in a state that did not have a gift tax, there would be no need for a filing. It would be wise to speak with an estate planning attorney to discuss the pros and cons of gifting the house in this manner described above, or as part of an inheritance.
Reference: nj.com (September 17, 2019) “I’m selling my home to my son at a discount. Is it considered a gift?”