if I buy a home for a $1, then sell it for a $1...implications?

[simple girl]

This is in the state of PA.

There are reasons we need to do this in order to get the family homestead transferred into my sibling's name. He is on SSI and needs time to sell his current home and therefore cannot immediately take the homestead property into his name (you are limited to one home when receiving SSI). Hence, I have been asked to take the homestead into my name and hold it until my brother is able to sell his current property. It essentially would be a "second home" for us until we transfer it to him.

I will not be inheriting the property due to the way the will is written, but the legal heir is willing to gift it to someone in the family, ie., me.

I spoke to an estate lawyer today. She said it is legal to sell a property for a $1, but, "On paper it will be for a $1. The Dept of Rev will not look at it as a $1."

I have read up on this and I think I understand that this will be a gift of equity, and that I need to report it if the value I give when I sell it exceeds $16K (just me) or $32K (if my husband and I receive and gift the property together). This is not an expensive property (likely worth < $40K - I guess I need to get an appraisal? Or would a CMA work?), so I probably would have some reporting requirements to the IRS for a nominal amount over $32K. I don't think that part will be a problem, given the high lifetime gift tax exemption is ~ $12 million. Actually I just read that if spouses are giving a gift jointly, they have to report it anyways, even if it is < $32K. So either way I'd have to file a gift tax return.


My biggest question is, will I owe capital gains tax on the property when I sell it to my sibling for $1, even though I bought it for a $1? I have read articles that state that the person receiving a fully gifted home does not get the stepped-up basis for the property when they sell it. But does this even matter if I am selling the home for a $1? There wouldn't be any gain on paper. Or do they not look at it that way? I want to do this legally. Not trying to skirt any laws! The lawyer made me wonder if this will be interpreted as a gain by the IRS.

I need to manage our MAGI for our ACA coverage so any capital gains would be bad for us.

I have another sibling that could serve as the intermediary, and we can explore that option if this will indeed result in capital gains after we "sell" it.

Thanks for any help!!!

P.S. I've looked into special needs trusts, but the value of what he is inheriting doesn't seem like it is enough to warrant the expense to create one, which I have read can be several thousand dollars. Am open to hearing any alternate viewpoints.

 

[MichaelB]

Can the property be gifted both ways? First to you, then you to final recipient? I’m no expert on these matters but gifting sounds like a way to avoid tax exposure entirely.

 

[simple girl]

Can the property be gifted both ways? First to you, then you to final recipient? I’m no expert on these matters but gifting sounds like a way to avoid tax exposure entirely.

You mean as opposed to selling it for $1? Good question!

I have no idea! Hopefully someone on here has some insight!

 

[street]

I know real property can be gifted and transferred through the legal process. Lifetime gifting which has been a topic here many times.
I don't remember all the details and legalities any more with the 709-lifetime gifting, but I would do that route instead of a sale for 1$. Just my 2¢

 

[simple girl]

I know real property can be gifted and transferred through the legal process. Lifetime gifting which has been a topic here many times.
I don't remember all the details and legalities any more with the 709-lifetime gifting, but I would do that route instead of a sale for 1$. Just my 2¢

Thank you. I will start researching this!

 

[street]

Thank you. I will start researching this!

Search 709 lifetime gifting the IRS rules are very straight forward. I have done the 709 forms with no hitch or problems. I can say it is best to do it by the law and not go around the law but still stay legal. The straightforward approach is best.

 

[simple girl]

Search 709 lifetime gifting the IRS rules are very straight forward. I have done the 709 forms with no hitch or problems. I can say it is best to do it by the law and not go around the law but still stay legal. The straightforward approach is best.

Thank you so much will do, and absolutely agree about keeping everything legal. I am definitely very risk averse and am a rule follower!

 

[ivinsfan]

I might be dense but you are saying your brother can only own one home for SSI. What happens when sells that home and has cash, not profits mind you but cash.



How is that any different? Is your brother mentally competent? If so I'd leave it to him and the relative that actually owns the place to figure this out. There is no benefit and potential downfall for you to be the middlewoman in this transaction. It seems like your brother is making the choice to exchange one home for another home. There much some benefit to him for him to desire this.

 

[simple girl]

So, if the heir gifts completely to me, then I later gift completely to my brother - the only person who has to worry about capital gains taxes would be my brother, if he should ever sell the property, right? (It is HIGHLY doubtful he would ever sell it.)

And since it's such a cheap property, and he will live there > 2 years for sure, the likelihood the property would ever have gains beyond his $250K exemption in his lifetime is essentially ZERO.

So noone should have to worry about capital gains. The givers just need to file the proper 709 form. And I need to establish the value of the property in case I am ever asked to substantiate the value of the property gifted. Wondering if a CMA will suffice instead of paying for an appraisal?

 

[cathy63]

There is no need to move $1 from hand to hand to make this a purchase unless it's for some reason other than taxes. If you buy a property worth $40,000 for $1, then the IRS considers that you received a $39,999 gift from the person you "bought" it from and that person has to file a gift tax return. Likewise, when you then sell the property to your brother for $1, you are giving him a gift worth the then current fair market value minus $1 and you have to file a gift tax return. There are no capital gains in this scenario.

If you want to be able to exclude $32,000 from the reportable gift amount, then you have to make sure the property is jointly owned with your spouse. He can't give $16K worth of something he doesn't own.

But again, what is the purpose of handing your relative $1 to make it a purchase? As your lawyer told you, the IRS will treat it as a gift even if you "buy" it for $1, so why bother? You can just fill out and record Quit Claim Deeds and transfer the property that way. There are still no capital gains to report.

 

[MichaelB]

Wondering if a CMA will suffice instead of paying for an appraisal?

My guess would be yes, a CMA is fine, as long as the supporting documentation is thorough.

 

[cathy63]

...
So noone should have to worry about capital gains. The givers just need to file the proper 709 form. And I need to establish the value of the property in case I am ever asked to substantiate the value of the property gifted. Wondering if a CMA will suffice instead of paying for an appraisal?

Yes, a CMA should suffice in the event of an audit. It's not even remotely close to being a taxable amount, and that would be obvious if the IRS ever looked at it.

 

[CardsFan]

OP, I know this is a private matter, but since you asked for input:

- Is there a reason you need to be in the middle of this? Why not let the heir gift directly?

- ivansfan pointed out that the sale of the current home will result in your brother holding cash. I know from experience with a relative, it does not take much cash to bounce him off SSI.

- I strongly suggest you get some legal advice on how to make this happen with minimal tax issues, and to assure your brother does not lose SSI.

 

[simple girl]

I might be dense but you are saying your brother can only own one home for SSI. What happens when sells that home and has cash, not profits mind you but cash.

He is allowed to own one car. His car is old and failing. He will use the proceeds of the sale of his house to buy a new car (after getting rid of his current one)

How is that any different? Is your brother mentally competent? If so I'd leave it to him and the relative that actually owns the place to figure this out. There is no benefit and potential downfall for you to be the middlewoman in this transaction. It seems like your brother is making the choice to exchange one home for another home. There much some benefit to him for him to desire this.

He is mentally competent (it is a physical disability), but does not have resources to figure all of this out or pay for counsel to assist him. He has very little money or knowledge of these kinds of financial matters.

I care about my brother and want to help him. I do not want to put myself at risk in doing so, though - a valid point. That's why I am investigating this thoroughly before agreeing to be the middlewoman. It is imperative to me to do this properly, legally.

 

[simple girl]

There is no need to move $1 from hand to hand to make this a purchase unless it's for some reason other than taxes. If you buy a property worth $40,000 for $1, then the IRS considers that you received a $39,999 gift from the person you "bought" it from and that person has to file a gift tax return. Likewise, when you then sell the property to your brother for $1, you are giving him a gift worth the then current fair market value minus $1 and you have to file a gift tax return. There are no capital gains in this scenario.

If you want to be able to exclude $32,000 from the reportable gift amount, then you have to make sure the property is jointly owned with your spouse. He can't give $16K worth of something he doesn't own.

But again, what is the purpose of handing your relative $1 to make it a purchase? As your lawyer told you, the IRS will treat it as a gift even if you "buy" it for $1, so why bother? You can just fill out and record Quit Claim Deeds and transfer the property that way. There are still no capital gains to report.

You see, this is why I posted here. So many people much smarter than me who are so helpful! Thank you so much - more for me to learn and investigate!

 

[simple girl]

OP, I know this is a private matter, but since you asked for input:

- Is there a reason you need to be in the middle of this? Why not let the heir gift directly?

That would CERTAINLY be my preference. The problem is, the heir wishes to close the estate as soon as possible, and the property my brother currently lives in might take a long time to sell. It's not worth much, even less than the one he is inheriting. Maybe, $25K or $30K. So that's the quandry.

- ivansfan pointed out that the sale of the current home will result in your brother holding cash. I know from experience with a relative, it does not take much cash to bounce him off SSI.

- I strongly suggest you get some legal advice on how to make this happen with minimal tax issues, and to assure your brother does not lose SSI.

You are absolutely correct, he will have to spend down $ received from the sale of his house as quickly as possible on appropriate items, hence the plan to buy a car. He will probably lose SSI for a month or two until we can get everything transitioned to his new house and newer car (he's allowed one each).

I agree on getting legal help. I have a call into a lawyer who specializes in SSI, spend down plans, etc. so that we can obtain assistance with reporting all of these changes properly. No way am I qualified to deal with all of that! He also does estate planning so I will be running all of this by him of course. I like to understand everything myself and make sure nothing is missed, hence I'm asking for input from the very smart people on this forum!

 

[CardsFan]

That would CERTAINLY be my preference. The problem is, the heir wishes to close the estate as soon as possible, and the property my brother currently lives in might take a long time to sell. It's not worth much, even less than the one he is inheriting. Maybe, $25K or $30K. So that's the quandry.

You are absolutely correct, he will have to spend down $ received from the sale of his house as quickly as possible on appropriate items, hence the plan to buy a car. He will probably lose SSI for a month or two until we can get everything transitioned to his new house and newer car (he's allowed one each).

I agree on getting legal help. I have a call into a lawyer who specializes in SSI, spend down plans, etc. so that we can obtain assistance with reporting all of these changes properly. No way am I qualified to deal with all of that! He also does estate planning so I will be running all of this by him of course. I like to understand everything myself and make sure nothing is missed, hence I'm asking for input from the very smart people on this forum!

Sounds like you have most of the bases covered. Hope this all works out as planned. The lawyer should help you avoid any pitfalls that might result in extended loss of SSI and the requirement to re-apply (if that is an issue, I do not recall from my experience)

 

[ivinsfan]

On the lawyer, your brother is already in the system so that makes a difference, plus they are expensive.


Does your brother have an office or point of contact person that works with him? He must have talked to somebody, sometime. If so would he allow your to conference in on a call ( I don't know if live in physical prox to bro)


I see a big potential problem when the info goes from your brother to you, to a lawyer back to you then back to your brother and back to the agency administering the SSI benefit. What could possibly go wrong.


Granted the SSI income is not your problem but OTOH if it gets goofed up guess who gets the finger pointing?


Not trying to be a Debbie Downer you are a good sister.


Maybe you just concentrate on the logistics of house transfer and leave it at that. PA is pretty greedy about inheritance taxes I don't know how they feel about gift taxes.

 

[ncbill]

"It essentially would be a 'second home' for us until we transfer it to him.

I will not be inheriting the property due to the way the will is written, but the legal heir is willing to gift it to someone in the family, ie., me. "

Once it's gifted to you it's yours...doesn't matter what any will says after that.

I'd worry about brother's continuing SSI eligibility...got a feeling the OP will be their landlord for awhile until that gets sorted.

 

[pb4uski]

Why is the heir in such a hurry to get rid of the house? Why can't they wait until you brother sells his current house?

Another option might be for you to buy your brother's house for $40k and it is all seller financed... your brother sells you the house in exchange for a mortgage secured by the house from you.

Then you sell the house for $40k and use the proceeds to pay the mortgage.

He never has more than one house.

 

[HarveyS]

He will probably lose SSI for a month or two until we can get everything transitioned to his new house and newer car (he's allowed one each).

Let him inherit the house and force his hand to sell his current house. If he misses a month or 2 of SSI because he has means, so be it. That's the way the system is supposed to work. As was said, there is no upside for you, only significant downside.

 

[gauss]

issue #1)
In general, won't DB have an SSI problem if he sells his current house and keeps the cash? Perhaps you already have a strategy to convert the home sales cash back into some type of uncountable asset -- but if not something to think about up front.

This problem would be similar to owning two homes -- only the first one is exempt.

issue #2)
Cathy63 correctly points out that there would be no capital gains tax due in these gift transactions. If it were me, I would still consider filing a Schedule D that shows $0 capital gain tax.

The reason is that you can use the Schedule D to capture the actual basis in the house. At some point this will be important when the final seller engages in an arms length transaction. The basis will likely be the FMV on the date of death of the original owner. This basis would be passed through in all the gift transactions. I never throw out my tax returns, so that is why this strategy is appealing to me. When 15 years down the line the house is being sold would not be the time to try to figure out what the basis was IMHO.

-gauss

 

[Alan]

I might be dense but you are saying your brother can only own one home for SSI. What happens when sells that home and has cash, not profits mind you but cash.

He is allowed to own one car. His car is old and failing. He will use the proceeds of the sale of his house to buy a new car (after getting rid of his current one)

issue #1)
In general, won't DB have an SSI problem if he sells his current house and keeps the cash? Perhaps you already have a strategy to convert the home sales cash back into some type of uncountable asset -- but if not something to think about up front.

They do have a strategy for the cash for his house sale.

[mod edit]

 

[ncbill]

Again, the OP can simply buy the house for $1, get it transferred into their name, and let brother move in, acting as his landlord until any SSI issues are sorted...but it will be their choice as to whether or not transfer it to brother.

It might make more sense just to let brother live for free until he passes (I assume significant health issues since he's a SSI recipient) and then move into the home for 2 years before sale to get the exemption.

 

[frank]

will the irs actually let you have a house and let someone live there for free with no tax consequences? what about depreciation on the property?