- The Washington Times - Wednesday, October 1, 2003

Editor’s note: Last week’s Clicks and Mortar column on this topic included erroneous information about the federal gift tax. The following column includes the correction.

Q: Would you please take a moment and give me your opinion on the following question? I have received several different answers. My wife and I recently sold a second residence to our daughter. At the sale, we reduced the sales price, in essence giving her $24,500 in equity, so that she would not have to make a down payment and also could avoid private mortgage insurance. Is the $24,500 subject to federal gift taxes?

A: You’re asking a tax question, so let me remind you I’m not an accountant. You should get a final answer from your tax professional or attorney. Nevertheless, the IRS rules on how to deal with gifts are quite clear.

First of all, let’s define a gift:

To quote the IRS: “The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.”

Most gifts are taxable; however, there are many exceptions. For instance, according to the IRS, the following gifts are not taxable:

• Gifts not more than the annual exclusion for the calendar year.

• Tuition or medical expenses you pay for someone (the educational and medical exclusions).

• Gifts to your spouse.

• Gifts to a political organization for its use.

• Gifts to qualified charities (a deduction is available for these amounts).

A separate annual exclusion applies to each person to whom you make a gift. For 2003, the annual exclusion is $11,000. Therefore, you generally can give up to $11,000 each to any number of people in 2003 and none of the gifts will be taxable.

If you and your wife are giving the equity together, you can give up to $22,000 to your daughter (each of you giving $11,000). With that note, it would appear that the taxable part of your gift is really only the difference between $24,500 and $22,000, or $2,500.

Many home sellers discount their properties or provide subsidies in the tens of thousands of dollars to make the deal happen — however, that’s usually when the seller is faced with a buyer’s market and can’t sell the property any other way.

Even in a healthy market, many buyers I know find out after the house has been appraised that they have negotiated a good deal and are walking in with extra equity. In these cases, the intent was to sell the house for the highest price possible for the seller, not to give equity to the buyer.

The IRS Web site (www.irs.gov) further explains that the gift tax “applies whether the donor intends the transfer to be a gift or not.”

What you’re proposing is a seller subsidy to your daughter. Many loan programs allow large subsidies in the program. Thus, if the house is worth $200,000, the seller could subsidize the deal up to $12,000. If other like properties are selling for the large subsidy you have provided to your daughter, the $24,500 may or may not be classified as a gift.

Again — check with your accountant. I also encourage you to refer to IRS Publication 950, “Introduction to Estate and Gift Taxes.”

M. Anthony Carr has covered real estate for more than 15 years. Contact him by e-mail ([email protected]).

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