Posted by Stephen Asbill on August 01, 2003 at 19:42:02:
In Reply to: gift of equity... posted by Amy on November 22, 2002 at 11:36:13:
Yes, Look up these tax codes: title 26 section 121, Publication 544, and Publication 523. Basically they state that on a PRIMARY RESIDENCE (PR) sale, the seller does not claim the income on his tax return if he does not have a gain of over $250,000 single owner, or $500,000 filing jointly. This means that if he bought the house for 155, and sold it for 135, he wouldnt have a gain at all to claim. Even if he sold it to you for 175,000 he would only have a gain of $20,000, not even close to the $250,000 limit for single owner.
If this were a sale of land, any income would be considered taxable income, but since its a primary residence, regardless of relationship, and the gain for the seller is under $250,000, publication 523 gives instruction to the seller to not claim the income from the sale of their main home on their taxes.
Now, publication 544 states that since the gift is a percentage of the price, the seller isn't selling his property for the full amount. If the seller gifts you 20%, thereby only selling 80% of his property, there will be an adjustment to his cost basis and your future cost basis. This means that when you sell the home, you have to add that amount to your cost, which probably is beneficial to you anyhow because it offsets your gain.