How to Calc Capital Gains on Home Sale /down payment was partially gift?
October 25, 2014 5:13 PM Subscribe
I have some help coming my way towards down payment. Let's say... for simplicity sake ...that I am receiving $100k as gift towards down. I know the gift amount won't count as "cost" when calculating capital gain at time of sale in the future. But if I receive the "gift" in chunks of $14k from various individuals under the annual gift exclusion clause, could any of those chunked amounts be included in my cost to reduce my capital gain? Thanks. I hope this is a simple yes/no question.
My concern is:
Capital gain is calculated as "Selling Price - (cost + improvements)" and my research suggests any gift amount does not get included as cost in the formula. So I'm trying to figure out as much as possible how to legally make as much of the down payment look as though it comes from me. Was thinking that any amount received as a $14k gift could still be included as part of my cost this reducing my capital gain.
I am trying to verify this w a financial planner too.
The idea was that if I receive the "gift" in chunks of $14k from various individuals under the annual gift exclusion clause, those chunked amounts are gifts that's am free to use discretionally and *could* be included in my cost to reduce my capital gain.
My concern is:
Capital gain is calculated as "Selling Price - (cost + improvements)" and my research suggests any gift amount does not get included as cost in the formula. So I'm trying to figure out as much as possible how to legally make as much of the down payment look as though it comes from me. Was thinking that any amount received as a $14k gift could still be included as part of my cost this reducing my capital gain.
I am trying to verify this w a financial planner too.
The idea was that if I receive the "gift" in chunks of $14k from various individuals under the annual gift exclusion clause, those chunked amounts are gifts that's am free to use discretionally and *could* be included in my cost to reduce my capital gain.
The purchase price is the cost basis, full stop.
posted by rabbitrabbit at 5:37 PM on October 25, 2014 [2 favorites]
posted by rabbitrabbit at 5:37 PM on October 25, 2014 [2 favorites]
Agree. Doesn't matter where the money came from, the cost basis begins with the purchase price. (It then gets increased as improvements are made, etc.)
Don't forget that $250,000 of capital gains on sale of a residence is excluded at any rate, even if another home is not purchased.
posted by yclipse at 6:04 PM on October 25, 2014
Don't forget that $250,000 of capital gains on sale of a residence is excluded at any rate, even if another home is not purchased.
posted by yclipse at 6:04 PM on October 25, 2014
I'm trying to figure out as much as possible how to legally make as much of the down payment look as though it comes from me.
Have people give you the money. You buy the house. Unless there is something lawyer-level weird here, the money/tax issues with getting gifted money have nothing to do with future capital gains stuff on house purchasing. I am assuming you are in the US since you seem to be talking about US gift tax stuff. There are other tax implications potentially for getting giant gifts from people but those are mitigated by chunking it into 14K chunks.
I feel like maybe there is something weird about this since unless you are buying a house to flip it, thinking about future capital gains seems ... unusual but maybe this is just because of a misunderstanding about how they work and are taxed in the US?
posted by jessamyn at 6:29 PM on October 25, 2014 [1 favorite]
Have people give you the money. You buy the house. Unless there is something lawyer-level weird here, the money/tax issues with getting gifted money have nothing to do with future capital gains stuff on house purchasing. I am assuming you are in the US since you seem to be talking about US gift tax stuff. There are other tax implications potentially for getting giant gifts from people but those are mitigated by chunking it into 14K chunks.
I feel like maybe there is something weird about this since unless you are buying a house to flip it, thinking about future capital gains seems ... unusual but maybe this is just because of a misunderstanding about how they work and are taxed in the US?
posted by jessamyn at 6:29 PM on October 25, 2014 [1 favorite]
I am receiving $100k as gift towards down. I know the gift amount won't count as "cost" when calculating capital gain at time of sale in the future.
Go back to whoever told you this and get your money back.
posted by JimN2TAW at 7:21 PM on October 25, 2014
Go back to whoever told you this and get your money back.
posted by JimN2TAW at 7:21 PM on October 25, 2014
Response by poster: Encouraging responses. Thanks!!!
posted by phreckles at 7:27 PM on October 25, 2014
posted by phreckles at 7:27 PM on October 25, 2014
As others have said, the IRS doesn't care where the money comes from. The cost basis is the price paid.
However, your lender will definitely care. You will have to show bank statements and if they see a lot of cash deposits showing up, they will want to know exactly where it came from. They may want statements from the sources that these are really gifts and not loans. The reason is that if loans, they have bearing on your indebtedness.
posted by JackFlash at 11:36 PM on October 25, 2014
However, your lender will definitely care. You will have to show bank statements and if they see a lot of cash deposits showing up, they will want to know exactly where it came from. They may want statements from the sources that these are really gifts and not loans. The reason is that if loans, they have bearing on your indebtedness.
posted by JackFlash at 11:36 PM on October 25, 2014
I hope you know what you're doing. Your wording in the question makes me quite anxious that you're doing something for which the IRS is going to kick your (or your "friends") butts.
posted by Justinian at 1:09 AM on October 26, 2014
posted by Justinian at 1:09 AM on October 26, 2014
Cost basis is what was paid, regardless of source. Whether that source is periodic annual exclusion gifts or one big gift is neither here nor there.
posted by jpe at 4:44 AM on October 26, 2014
posted by jpe at 4:44 AM on October 26, 2014
Yes, the only case in which the basis would be affected would be if the people who were giving you money actually had an ownership basis in the home. If you they give you cash, then you use that cash to buy the money, you're fine.
Also, you are probably worrying too much about keeping the gifts under the $14,000 threshold. That's the amount that doesn't count toward the combined gift and estate tax limit. It's an issue only if one of the people who is giving you money has more than $5 million to give away (through gifts and/or bequests). So if your grandparents want to give you $50,000 for a house and don't have millions more in the bank, let them.
posted by Mr.Know-it-some at 7:44 AM on October 27, 2014
Also, you are probably worrying too much about keeping the gifts under the $14,000 threshold. That's the amount that doesn't count toward the combined gift and estate tax limit. It's an issue only if one of the people who is giving you money has more than $5 million to give away (through gifts and/or bequests). So if your grandparents want to give you $50,000 for a house and don't have millions more in the bank, let them.
posted by Mr.Know-it-some at 7:44 AM on October 27, 2014
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#1 - Various friends and family give you cash gifts. Call it birthday money. It goes into your bank account along with all the rest of your money. You then buy a house. You pay $XX for the house. The amount you pay is the cost. Doesn't matter where the money comes from. When you sell the house, you start with the price paid (regardless of where the money came from - for example borrowing money from friends or a via mortgage does not change the price paid)
#2 - The seller is a friend/ family member. You agree to pay $xx for the house but then they offer to let you pay less, making a gift of the difference. Call a lawyer, accountant pronto - easy to get into trouble on this one.
posted by metahawk at 5:24 PM on October 25, 2014