“My wife and I have agreed to sell our house to our son. The bank-appraised value of the property is $700,000 and we are selling it to him for $340,000, which is the amount of the mortgage. How will the $360,000 be treated and are there tax consequences?”
If a parent sells his home to his adult child at half the appraised price, this would be considered a gift, says nj.com in the article “I’m selling my home to my son at a discount. Is it considered 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.
Many states don’t have a gift tax, so there would be no filing if the property is located in a state that doesn’t have a gift tax on the books.