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Purchasing A Friend's Property at below appraised / market value

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pinarello

New member
Hi Everyone,

First, Thank you ahead of time for taking the time to answer my question.

Is there any legal/tax issue to purchase a property from a friend in California who is willing to sell it below appraised value. Example: appraised value of the property is $750K and my friend purchased it awhile ago for $400K and the loan left on it is $300K. Is there any issue for him to sell it at $380K, which is $300k loan amount left and 80K gift equity to cover 20% and closing cost? I've been living at this property and basically been making the payments for the past 10 years and we both decided that it makes sense for me to purchase it at the loan amount. What are the tax implications for the seller and the buyer? What about in California?

Thank you,
Ted
 


LdiJ

Senior Member
Hi Everyone,

First, Thank you ahead of time for taking the time to answer my question.

Is there any legal/tax issue to purchase a property from a friend in California who is willing to sell it below appraised value. Example: appraised value of the property is $750K and my friend purchased it awhile ago for $400K and the loan left on it is $300K. Is there any issue for him to sell it at $380K, which is $300k loan amount left and 80K gift equity to cover 20% and closing cost? I've been living at this property and basically been making the payments for the past 10 years and we both decided that it makes sense for me to purchase it at the loan amount. What are the tax implications for the seller and the buyer? What about in California?

Thank you,
Ted
Its perfectly legal. There would be no particular issues.
 

Taxing Matters

Overtaxed Member
Hi Everyone,

First, Thank you ahead of time for taking the time to answer my question.

Is there any legal/tax issue to purchase a property from a friend in California who is willing to sell it below appraised value. Example: appraised value of the property is $750K and my friend purchased it awhile ago for $400K and the loan left on it is $300K. Is there any issue for him to sell it at $380K, which is $300k loan amount left and 80K gift equity to cover 20% and closing cost? I've been living at this property and basically been making the payments for the past 10 years and we both decided that it makes sense for me to purchase it at the loan amount. What are the tax implications for the seller and the buyer? What about in California?

Thank you,
Ted
So if I understand you correctly, you would buy the property at $380k cash and actually assume the loan with the remaining $300k left (most lenders will not let the sale go through to you without you assuming it), for a total sale price of $680k? And the fair market value of the property is $750k? Then what you have is a part gift, part sale transaction. He'd be making to you a gift of $750k-680k = $70k. He'd need to report that gift on a federal gift tax return and will have his lifetime unified credit against gift tax reduced by $55k as a result, but would not have to pay any actual gift tax unless he exhausts his unified credit. You have been living in it for the past 10 years and he presumably has not. Thus, he will have a long term capital gain on the sale of the house on his federal and state income tax returns. The computation of this is more complex than it would appear since his basis in the house gets split: part of it will be allocated to the sale portion of the transaction and part of it allocated to the gift transaction. That split of basis matters to you, too, since it affects your starting basis in the home. You and he may want to see a tax professional familiar with split gift/sale transactions to get it right.
 
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LdiJ

Senior Member
So if I understand you correctly, you would buy the property at $380k cash and actually assume the loan with the remaining $300k left (most lenders will not let the sale go through to you without you assuming it), for a total sale price of $680k? And the fair market value of the property is $750k? Then what you have is a part gift, part sale transaction. He'd be making to you a gift of $750k-680k = $70k. He'd need to report that gift on a federal gift tax return and will have his lifetime unified credit against gift tax reduced by $55k as a result, but would not have to pay any actual gift tax unless he exhausts his unified credit. You have been living in it for the past 10 years and he presumably has not. Thus, he will have a long term capital gain on the sale of the house on his federal and state income tax returns. The computation of this is more complex than it would appear since his basis in the house gets split: part of it will be allocated to the sale portion of the transaction and part of it allocated to the gift transaction. That split of basis matters to you, too, since it affects your starting basis in the home. You and he may want to see a tax professional familiar with split gift/sale transactions to get it right.
I am not sure that I agree that there is a gift involved. Yes, the house is being sold below market value but we do not understand why the friend is selling below market. Perhaps the friend urgently needs cash for something important right now and cannot wait for the normal amount of time it would take to sell a house...hence the "discount".
 

Taxing Matters

Overtaxed Member
I am not sure that I agree that there is a gift involved. Yes, the house is being sold below market value but we do not understand why the friend is selling below market. Perhaps the friend urgently needs cash for something important right now and cannot wait for the normal amount of time it would take to sell a house...hence the "discount".

There is nothing here to suggest that the lower price was negotiated at arms length. Indeed, the OP indicated himself/herself that the gap between the purchase price and the FMV is "gift equity" to enable the OP to have the 20% down needed to get the loan that presumably will finance the deal, including buying out/assuming the existing loan. Thus, the friend is doing the OP a favor since the OP apparently doesn't have the cash saved to make a down payment to get a mortgage. The only reason given for the sale was:


I've been living at this property and basically been making the payments for the past 10 years and we both decided that it makes sense for me to purchase it at the loan amount.
That hardly strikes me as an arm's length bargained for exchange nor does it suggest the seller is under some kind of pressure to unload the property fast. The fact that they are friends, of course, also helps support that conclusion as it explains why the seller would make the gift.

So, just based on what we do have here, I have to assume that that it is a gift-sale transaction.
 

adjusterjack

Senior Member
Pardon my suspicious mind but I'm having a problem with anybody giving up $370,000 in equity no matter how close the friendship or how desperate the friend's finances are.

I'm wondering what else is going on. Like maybe an end run around community property laws. Which would almost certainly blow up in the friend's face.
 

LdiJ

Senior Member
Pardon my suspicious mind but I'm having a problem with anybody giving up $370,000 in equity no matter how close the friendship or how desperate the friend's finances are.

I'm wondering what else is going on. Like maybe an end run around community property laws. Which would almost certainly blow up in the friend's face.
I read it that he was giving up 70k not 370k. 380 cash plus assuming the mortgage. That is how TM took it too.
 

Taxing Matters

Overtaxed Member
Pardon my suspicious mind but I'm having a problem with anybody giving up $370,000 in equity no matter how close the friendship or how desperate the friend's finances are.
The post, read in its entirety, suggests to me that the seller is giving up $70k in equity, not $370K. But as it wasn't clear I specifically told the OP what I was assuming so that he/she could correct the facts if I have it wrong. If it was $370k equity, there would be no need to mention $80k in "gift equity" to meet the 20% down payment and closing costs that the OP mentions. He/she would have far more equity than $80 in the case you mention. It would certainly be helpful for the OP to clarify exactly what the deal was.
 
Selling any property in California for less than market value may make some people with a suspicious nature think "Money laundering".
But that's just me thinking aloud.
 

adjusterjack

Senior Member
Selling any property in California for less than market value may make some people with a suspicious nature think "Money laundering".
But that's just me thinking aloud.
And possibly tax avoidance. California is notorious for astronomical property taxes and transfer taxes.
 

justalayman

Senior Member
Has anybody asked about whether the seller is looking towards bankruptcy or being sued? A below market sale could play heavily in either of those issues.
 

pinarello

New member
Hi Everyone,

Sorry for the late reply. So the current loan that is left on the house is 300K. I do have the money to put a down payment. But in talking to my lender, he said since there is enough equity on the house - I can use the equity as a gift that covers the 20% down and closing cost.

I will be getting a loan of 300K but b/c of the 20% and closing cost, the lender will use 380K if that makes sense? The question I had was does the seller get taxed at the sell price of 380K? How does the 80K gift equity work?

Like I mentioned, the property is appraised at $750K. The reason I am getting it for a lower price is basically I've been making the payments for the place. I'm just wondering how the tax works for the seller and the buyer?

Thanks again,
Ted
 

pinarello

New member
The post, read in its entirety, suggests to me that the seller is giving up $70k in equity, not $370K. But as it wasn't clear I specifically told the OP what I was assuming so that he/she could correct the facts if I have it wrong. If it was $370k equity, there would be no need to mention $80k in "gift equity" to meet the 20% down payment and closing costs that the OP mentions. He/she would have far more equity than $80 in the case you mention. It would certainly be helpful for the OP to clarify exactly what the deal was.
Hi - the loan that is left on the house is 300K that I will need to take over. For me to make a purchase at that price, the lender suggested to use the equity of 80K so the sell price would be 380K. 300K for the loan and 80K for the gift equity. At that point, I would be only responsible for 300K loan amount to pay off. I was wondering about how the tax works for the seller and the buyer.

1. Is it ok to sell all below market value? The lender said it was ok.
2. The lender wasn't sure about how the tax worked. So was wondering if the seller gets taxed at 380K or 80K gift equity if any? What about the buyer?
 

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