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income/ gift or Capital Gains taxes?

Posted on: 31st Jan, 2007 09:45 am
We co-own a property and want to sell our half to the other couple. They plan on getting a home equity line of credit on that property to buy us out. The bank requires that they have full title to the property prior to final approval on the loan. So we had planned on selling them the property for $1, with a promisory note that they owe us $194,000 upon the closing of their home equity line (later that same day). Would this work, or would the $194,000 be taxed as income or gift rather than Capitol Gains?

Thanks, Keh
What I have heard is that if there is no interest charged on the promissory note then IRS can consider it as a gift and require payment of gift taxes on it.
Posted on: 31st Jan, 2007 12:15 pm
Hi Kirstenhartwig,

Welcome to the forums.

If you charge the buyer/borrower an interest rate below the Applicable Federal Rate (AFR), then the Internal Revenue Service will consider your forgone interest as a gift to the borrower.

Hence you will have to pay gift tax on the value of the gift. But there is also an exemption of the tax up to a value of the gift worth $12,000 per person, per year for a single person. The gift value on which there is a lifetime exemption is $1 million for an individual.

You may contact an accountant or a tax advisor on this issue.

Thanks,

Sara
Posted on: 31st Jan, 2007 08:33 pm
True Sara.

When a person sells a property at less than its full market value or if he makes an interest-free loan or a loan with reduced interest, then it is considered to be a gift.
Posted on: 31st Jan, 2007 08:36 pm
Excellent! thanks for all the great help!
So it sounds like as long as the foregone interest is less than $12,000 then there is no gift tax, and there is only the Capitol Gains tax on the actual sale price of the property.
Posted on: 03rd Feb, 2007 04:55 pm
I might be wrong but from what I understood from Sara's post and the other posts is that if interest charged is lower than the AFR then gift taxes would have to be paid on the value of the gift, i.e., $194,000 and not on the foregone interest amount. But I would like to let you know that apart from the annual exemption limit there is also a lifetime estate tax exemption limit ($2,000,000) up to which one can gift without being taxed.

As per Sara's post -
"the Internal Revenue Service will consider your forgone interest as a gift to the borrower.

Hence you will have to pay gift tax on the value of the gift."

Greinke
Posted on: 03rd Feb, 2007 05:50 pm
Hi Greinke,

No doubt the gift tax is paid on the value of the gift and here the foregone interest is considered as the gift. So, here the value of the gift is the foregone interest amount. Also the unified lifetime exemption limit for the gift and estate tax is around $2 million with the exemption on gift tax being $1 million.

The above fact implies that each and every person can transfer in total property worth $2 million during lifetime or at death without having to pay any gift or estate tax. But the question of estate tax does not arise in this situation as it is paid by the heirs of the deceased person.

Hope it is now clear to you.

Sara
Posted on: 04th Feb, 2007 11:35 am
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