Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
The OP has good questions, and I would add this one, which I don't believe has been brought up:
Does a below market transaction affect appraisal value of similar homes in the same neighborhood (i.e. "comps")?
For instance if my home, and homes in the neighborhood which are very similar are in the $300K range, but if my neighbor sells her home, very similar and next door to mine, to her son for $50K so she can move into a townhome, would that affect me if I were having an appraisal done to refinance my home? Or would the appraiser realize this wasn't an arms-length transaction and adjust the appraisal for my home accordingly?
The IRS definitely cares about these type transactions and, if they find out about them, will IMPUTE a fair market value to the transaction for both parties. Further, if the seller uses this type transaction in an attempt to reduce his taxes or otherwise circumvent the federal tax laws and doesn't report the fair market value of the sale on his federal taxes, then he may be a guest at a federal facility for quite a few years. Similar type things have been attempted to evade inheritance taxes... and they don't work either.
I would image that most states which have state income taxes will have a similar negative view of this type transaction. In short, don't think you're going to get away with evading taxes by some such simplistic scheme. Oh, it's OK to sell a million dollar house to your son for $1 as far as how much your son actually pays you, but when it comes to reporting the sale of this property, don't be so dumb as to think that IRS is going to accept that number as the actual selling price for tax purposes.
As to how it affects the local real estate market, the answer is "not at all".
I thought selling to a family member at below market values could incur gift taxes (maybe not the tax itself due to the lifetime exclusion, but at least a mandated reporting to the IRS if the delta is over $15K).
I haven't read the entire linked article, but a quick look seems to indicate it has pretty good information about selling your house to a relative. Check it out if you're interested. A quick Google search turned up about a dozen similar articles.
The IRS definitely cares about these type transactions and, if they find out about them, will IMPUTE a fair market value to the transaction for both parties. Further, if the seller uses this type transaction in an attempt to reduce his taxes or otherwise circumvent the federal tax laws and doesn't report the fair market value of the sale on his federal taxes, then he may be a guest at a federal facility for quite a few years. Similar type things have been attempted to evade inheritance taxes... and they don't work either.
I would image that most states which have state income taxes will have a similar negative view of this type transaction. In short, don't think you're going to get away with evading taxes by some such simplistic scheme. Oh, it's OK to sell a million dollar house to your son for $1 as far as how much your son actually pays you, but when it comes to reporting the sale of this property, don't be so dumb as to think that IRS is going to accept that number as the actual selling price for tax purposes.
As to how it affects the local real estate market, the answer is "not at all".
The IRS is so understaffed that they can’t even investigate people who make millions and don’t even bother to file. It’s made the news, not hard to find if you care to.. Kind of a ****-off to those of us who file diligently..
Further, there’s another type of “below market†transfer available that is pretty easy to defend - selling at the tax appraiser’s “market valueâ€. Tax appraisals are nearly always below market value, especially in properties that haven’t changed hands on the open market in a long time. A real-world “million dollar†home is likely sporting an “actual cash value†(by the tax authorities) of a couple hundred grand less than a million bucks. Especially in an overheated market that might well have been increasing at a rate of ten-twenty percent annually for several years..
Selling a property right at that “tax value†lowers the basis, increases gains, and lowers future property taxes - while simultaneously tanking the neighborhood values.. The IRS (who isn’t a factor) would have a heck of a time proving that a property was worth more than the local tax authority said it was - especially months or years later.
Can it happen ? Sure.. I’ve seen it a couple times near properties that I’ve owned.. and the tax authorities in those cases called those transactions “arm’s lengthâ€, even though the buyers and sellers had the same last name.
My accountant cautioned me about even renting to a family member at below fair value, let alone selling.
I assume that if you suddenly become the owner of a $200,000 property you will, at some point, be asked how much you paid for it. You may get by with it for a long time, maybe not.
Can I give you $200,000?........ No. You have to declare it and pay taxes. So I can't give you a home worth that, either.
People who win houses in lotteries and give-aways find this out all the time.
I've been told these are sales to family members. I'm curious about this type of transactions:
1. Is it true that these are family member transaction? Could it occur for other circumstances? Probably family members or a partial transfer (portion of the property).
2. Can it occur for other purposes?
3. In general are these transactions true? Meaning, only that much money changed hand? Probably yes.
4. If below-market sale is allowed, is there a limit on how low this can go? Can it be $100 or even $1? There has to be some consideration for a sale to take place
5. I think I know the answer but still have to ask: Does this below-market transaction price affect the property tax base? The assessor will not put in the lower than market value. By law, it must be appraised at fair market value. However, if only say half the property transferred ownership, only half will be reassessed at fmv and the new value will be half the old value and half the new value in California under Prop 13. I used to do this for a living at the assessor's office.
6. Does this below-market transaction price affect the seller's capital gains/loss?
7. Does this below-market transaction price affect the buyer's cost basis?
8. Does this below-market transaction price affect the estimated prices for the same neighborhood? I know if the transaction price is higher it can lift the estimate of the neighborhood (RE agents like to brag that they "set a new comp"...)Appraisers will not use it as a comp because they know it's not fair market. Computer generated programs like Zillow may use it or not, depends on their algorithm.
9. Are there other implications from this below-market transaction price?Yes. You are essentially gifting the buyer the difference between fair market value and the selling price so those amounts will be subject to federal gift tax laws
I can't answer the capital gains questions but you can bet the government will collect anything it's entitled to.
Yes I understand the sell-to-family part. I am just thinking, depending on the features of this type of transaction, whether this can be a legit tax saving/tax deferring tool....
For example, if the below-market price is used to calculate capital gain/loss of the seller, then it can defer tax.
Nope.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
