Category: Nontaxable Exchanges; Real Estate;
Estate & Gift; Individuals
Subject: Part-Gift, Part-Sale of Home
Title: Various Issues
IRC Sections: 1034, 121
Filename: 1233.html
Date Produced: 05/95 Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background
Taxpayers (TP's) are husband and wife each of whom are under 55
years of age. TP's owned a principal residence with a fair market
value of $160,000 and a basis of $110,000. TP's transferred the
residence to their son and daughter-in-law (jointly) for $110,000.
TP's executed a "gift of equity" document to account
for the difference between the fair market value of $160,000 and
the sale price of $110,000 to allow the son and daughter-in-law
to qualify for a loan of $110,000. TP's may repurchase the house for $160,000 and re-occupy it
as their principal residence. Issues
1. How much gain or loss is realized by TP's? 2. What are the gift tax consequences of the initial transfer
of the residence, if any? 3. What is the basis of the residence in the hands of the son
and daughter-in-law? 4. If TP's repurchase the residence, is it considered a replacement
residence under Section 1034? Answers
1. TP's recognize no gain or loss on the sale. Although the transaction
is viewed in part as a sale and in part as a gift, the TP's basis,
$110,000, is exactly equal to the sale proceeds. Accordingly,
even though the sale is a taxable event, there is no net gain
to report. 2. There is clearly a potential gift of $50,000 in this situation
measured by the difference between the fair market value of the
property transferred and price at which the property was actually
sold. The TP's can file gift tax returns and elect to split gifts
thereby allowing each spouse to donate $10,000 per donee free
of gift tax. Since there are two spouses and two donees, a total
of $40,000 can be given without gift tax. The remaining $10,000
is subject to gift tax. You have informed me that TP's have ample
unified transfer tax credit to absorb the potential gift tax;
accordingly, no gift tax will be payable as a result of this transaction. 3. The basis in the residence in the hands of the son and daughter-in-law
is $110,000 the amount paid for the property. 4. Since there was no gain on the initial transfer of the property,
the replacement residence issue is moot. However, there is no
prohibition against acquiring an old residence as a replacement
residence in a Section 1034 transaction. There is no authoritative
pronouncement sanctioning such a replacement, but Private Letter
Ruling 7942086 does specifically allow an old residence to be
treated as a replacement residence under Section 1034. (PLR's
cannot be cited or used as precedent) Discussion: Issue 1
Regulation Section 1.1001-1(e) speaks directly to the issue at
hand as follows. §1.1001-1 Computation of gain or loss.-- Paragraph
(e) Transfers in part a sale and in part a gift.
(1) Where a transfer of property is in part a sale and in part
a gift, the transferor has a gain to the extent that the amount
realized by him exceeds his adjusted basis in the property. However,
no loss is sustained on such a transfer if the amount realized
is less than the adjusted basis. For determination of basis of
the property in the hands of the transferee, see §1.1015-4.
For the allocation of the adjusted basis of property in the case
of a bargain sale to a charitable organization, see §1.1011-2.
(2) Examples. The provisions of subparagraph (1) may be illustrated
by the following examples:
Example (3). A transfers property to his son for $30,000. Such
property in A's hands has an adjusted basis of $30,000 (and a
fair market value of $60,000). A has no gain and has made a gift
of $30,000, the excess of $60,000, the fair market value, over
the amount realized, $30,000. Notice that the facts of the example are precisely TP's facts.
It is merely necessary to substitute $160,000 for $60,000 and
$110,000 for $30,000. Discussion: Issue Three
The basis of the purchased home in the hands of the son and daughter-in-law
is governed by Regulation Sections 1.1015-4(a) and 1.1015-4(b). 1.1015-4, Transfers in part a gift and in part a sale.--,
Paragraph (a), General rule. Where a transfer of property is in part a sale and in part
a gift, the
unadjusted basis of the property in the hands of the transferee
is the sum of --
(1) Whichever of the following is the greater:
(i) The amount paid by the transferee for the property, or
(ii) The transferor's adjusted basis for the property at the time
of the transfer, and
(2) The amount of increase, if any, in basis authorized by section
1015(d)for gift tax paid (see §1.1015-5). Miraculously, the examples found under paragraph (b) cross-relate
to the examples provided in the regulations regarding determination
of gain. Regulation Section 1.1015-4(b):
The rule of paragraph (a) of this section is illustrated by
the following examples:
Example (1). If A transfers property to his son for $30,000, and
such property at the time of the transfer has an adjusted basis
of $30,000 in A's hands (and a fair market value of $60,000),
the unadjusted basis of the property in the hands of the son is
$30,000. Again, it merely necessary to substitute the numbers related
to this case for the numbers contained in the regulation. Observation
It seems to me that all the parties in this case could place themselves
in the same tax and economic situation they had before this entire
series of events took place by simply reversing the process. If
the parent's reacquire the home at $110,000 either by assuming
the existing mortgage or by paying $110,000 is cash, the son and
daughter-in-law would be subjected to exactly the same tax consequences
as the parents on the "forward" side of the transaction.
In other words, the son and daughter-in-law would recognize no
gain or loss on the transfer and the parents would regain the
house at its original basis of $110,000. It seems to me that the
only tax "loss" resulting from the transactions would
be as follows. -Both the parents and the son/daughter-in-law will have lost
$10,000 of unified transfer tax credit for estate and gift tax
purposes. -Both the parents and the son/daughter-in-law will be required
to file gift tax returns (four in all). -I suspect these events may restart the clock for purposes
of the period of time the parents must live in the house if they
ever want to sell it and use the over-55-years-of-age-rule. (Section
121.) -These events restart the parent's holding period for the
property for purposes of capital gains.
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