I plan on using a gift of equity to use as a down payment and to pay closing costs on a new mortgage. Is the person that will be gifting me the equity liable to pay taxes on the gift? I know that over 15k has to be reported to the IRS to go against the lifetime maximum of 5.5 million, but I'm seeing mixed answers as to the tax liability question.
Thanks in advance!
Posted Jun 21, 2018, 1:35 PM UTC
Gifting is complicated. Short answer here - If the person is gifting under $5.5 million worth of equity, the individual (giftor) will not have to pay taxes on the gift, though he/she will use up the lifetime exemption. No experience gifting equity but I imagine it would be taxed at its FMV. I'm assuming it has some sort of FMV if you're using it as a down payment/paying off closing costs.
For tax purposes, the amount of the gift will be the "basis" of the equity at the time of the gift. Basis is generally determined by what was initially paid for the equity.
It gets complicated when the basis is less than the fair market value of the equity at the time of the gift, so I'm going to assume you were given stock that's worth more now than when the giftor bought it.
The amount of the gift is the amount paid for the stock. If you sell the stock, you will realize a gain for the difference between this basis and the selling price. This will be taxable income to you.
The person giving the gift is responsible for any tax liabilities. The person receiving the gift does not pay the taxes on said gift.
I understand. But I'm reading in most places that there is no tax liability on gifts of equity, and that's what I'm trying to nail down.
When you say equity, are they gifting shares in a company? Or equity in a house? In either case, they should not have any income tax liability as a result of making the gift. As you note, gift tax could apply, and amounts over the annual exclusion will count against the giver's lifetime exemption (currently over 11M USD, but could change in the future).
If the gift is cash, basis is not a consideration. If the gift is shares in a company, the recipient will generally take a carryover basis equal to the giver's basis and may have taxable capital gains on the subsequent sale or exchange of the shares.
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