Below Market Value home sale to avoid Capital Gains

[j_two]

Background: Several months ago, my wife and I approached our landlord (in Virginia) and offered to buy the house we are living in. She considered it, and told us that she might be willing if she could put the official sales price at 200,000 below market value so she could avoid paying capital gains. But, she would require us to take out a home equity loan immediately after closing for an additional 200,000. While we were thinking about it (at the time we didn't know that this is illegal), she decided that she did not want to sell.

Then: A week later, she sent an appraiser over. The appraiser was followed by her giving us 45 days notice to vacate the property. She insisted that she was not selling the house. She just wanted to offer a place to live to a friend in need, she said. Okay, fine. We found another place to live. Then strange mortgage and homeowners letters started showing up in the mail, addressed to a person I have never heard of. I checked the County tax website, and sure enough, she sold the house for $200,000. This is in a neighborhood where nothing is selling for less than $500,000. I'm almost certain that she sold to a friend using the same scam she proposed to us.

So, a question.

I would like to know if her selling the house below market value is legal for the purpose of avoiding capital gains. If so, how do I report her? I have heard rumors that their is a possible "reward" for turning in people like that. True? Thanks!

 

[Some Random Guy]

you should have bought the house from her.

It is a standard part of real estate contracts that "there is no agreement beyond what is in the sales contracts" you could have bought the house for 300,000 and never paid her the extra 200K.

But now that you have lost the house - I doubt that you can get a reward for turning her in. But if you are feeling vengeful, contact the county and let them in on the scam. It will prevent the property taxes from being calculated on the sales price.

The IRS does give rewards for providing evidence of fraud, but generally they require a large amount of taxes evaded (concealing 200,000+ in in come probably qualifies). However, there is no federal crime committed yet because the person hasn't filed their taxes yet.