Six years ago, my parents bought a house in which I have been living and paying rent to them. They have never lived in the home and have been reporting the home as rental property on their income taxes. My parents now want to sell the house to me and pay off the balance remaining on their mortgage loan. They have offered to give me a Gift of Equity to assist with purchasing the house. Questions have arisen though regarding the tax implications of my parents' gift and also regarding the home's increase in value over the past 6 years.
The home was purchased in 2002 for $160K and is now assessed at $229K. My parents owe $110K on their existing loan, and I have prequalified for a loan in that amount.
On our sales contract, the loan officer wants to set the sale price of the home at $210,000 (slightly under assessed value) and the gift of equity from my parents at $115,000, thus allowing the gift to cover closing costs and the down payment. This also lets me avoid mortgage insurance and allows me to qualify for a much lower interest rate on my loan due to the home’s loan-to-value. All of this is wonderful for me; however, I do not want to cause a burden on my parents because of the transaction being structured in this way.
My questions are: Would my parents be subject to paying taxes on the gift of equity, as it exceeds the permissible annual tax-free gift of $12,000? Will my parents have to pay capital gains taxes on the sale of the home even though they are not profiting and are only receiving the balance due on their current mortgage loan? The home is in the state of Virginia which does impose capital gains taxes.
We have heard varying arguments for and against the transaction proposed by my loan officer as described above due to the potential tax liabilities. Any advice or assistance you can offer would be greatly appreciated.
