Tax Law (Questions About Taxes)/Favorable home purchase

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Question
QUESTION: Hello Mr Stancil,

I read the question and your answer below and have some questions.
Our situation is that we have a good FRIEND who's selling her house to us for ~$560k and it's currently valued at $~$670k. You've answered below on the side of the seller but we'd like to know what are our tax consequences on the buyer's side and considering that that buyer/seller relationships are friends.

Also, since your answer was back in 2007, does this still apply today?  Any changes or additions to tax laws?

Regards,
Matt

__________

Expert: John Stancil, CPA - 1/22/2007

Question
My parents are moving out of the state and they want me to buy their house. So, l'm trying to find out what will the best and cheapest way to do this.
I want to save money on tax and also keep the morgage as low as possible.
At the current house value... I'll have very tough time paying the morgage.
Is it possible to buy a house under current market value?
I want to keep the value where I can do the payment.
Thanks in advance...  


Answer
Danny,

Thanks for your question.

There is certainly no law prohibiting you from buying a house under market value.  

However, since you are buying it from your parents, it becomes a related party transaction.  If you buy it for significantly below market value (less than it would sell to an outsider) your parents are considered to have made a gift to you of the difference between the FMV and what you paid.  If this is over $12,000 per person (both parents could give $12,000 each) they would have to file a gift tax return.  If they have not given any prior taxable gifts, they would need to file a return, but no tax would be due as there is a $1,000,000 lifetime exemption per person.

Hope this helps.

John Stancil,CPA

ANSWER: Matt,

Thanks for your question.

In your case, the purchase is from a non-related party, so the related party rules do not apply.  The sale price is probably reasonable in today's market.  I don't see that there would be any tax issues that should be of concern to you.  Your basis would be what you actually pay for it, not the appraised value.

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: Hi John,

Thanks for your answer. In today's current tax laws (I live in San Jose, CA), what kind/type of tax are we looking at if we are looking to buy the home from our good friend for $560K and turn around and sell it for $670K with $110K equity in this transaction?
Some of our friends mentioned there's a gift tax, capital gains tax etc.

Thanks,
Matt

Answer
There is no capital gains tax per se.  It is income tax using the capital gain rate.  Tax at the capital gain rate is zero, 15, or 20% depending on your marginal tax bracket. You would not be responsible for any gift tax.  

Hope this helps.

John Stancil, CPA

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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