Real Estate Gift?

[finances]

I am buying a house from my parents, in NY. To make the transaction simple, and save attorney's fees, they are going to transfer the deed to my name. Then, I am going to receive a mortgage (80%) based on the bank's appraisal. I am going to give the mortgage money to my parents, as the sales price. Obivously, there is no real gift, here.

If we sign a sales contract, after the fact, can we skip the filing of a Gift Tax Return?

They will need to file a federal return, for the sale of their residence. There will be no capital gains tax, as the amount is less than $500,000.

Am I correct in my thinking?

 

[loku]

Sale rather than gift

It is a sale and not a gift, and if your parents owned and lived in the house for 2 years out of the last 5 they can exclude up to $500,000 of gain. If that is the case, they should keep their records pertaining to the home, but they do not report the sale on their income tax return.

 

[finances]

Thanks, for your response. My parents are going to file a Quit-Claim Deed, and give me the house. I am going to apply for a mortgage, after the fact (80%). Therefore, this would be considered a gift. However, I am going to give them some of the mortgage proceeds.

Do we sign a contract, indicating a "new" sales price, after the mortgage? Then they can file a sale of residence return, without any capital gains tax due.

 

[loku]

As I said, this is a sale, not a gift. The fact that the deed comes before the mortgage is not relevant. The IRS looks at the entire transaction. However, if it would make you feel better about this, draw up a contract to do exactly what you propose to do before they sign the deed.

Also, as I said, if they can exclude the entire gain, they do NOT FILE a return for the sale of the house.