I am buying a house from my brother, the house is worth $220,000. and my brother willing to sell it to me for whatever the house is owe the bank, which is $170,000. He is willing to give me all of the equity of the house to me, so i can put it down for down payment and closing cost. my question is with the $50,000 equity that I'm receiving, does my brother or I will need to pay tax on it? i did some googling, and it said the if you give pass $15,000 then you have the life time exclusion to fall back to which is limit of $5.6m. but I'm not sure about it, and when i talked to my mortgage loaner, he isn't sure also.

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    I am almost certain you cannot use the "equity" AKA the difference in the price you want to pay for the house versus what it appraises for, as a down payment and certainly not for closing costs. Well, at least not in the US. – mkennedy Jul 5 '19 at 17:39
  • I've talked to quicken loan agent, and that's what he told me...he even said if that tax thing work out, i don't have to pay anything out of my pocket – Addiction006 Jul 5 '19 at 17:41
  • Is $220,000 the sale price that your brother bought it for, or it's actual current market value as determined by a real estate appraiser? It it's the sale price, what's the current market value of the house? If $170K is less than 80% of the current market value, then it's very possible that you don't need a down payment. – RonJohn Jul 5 '19 at 17:47
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    "if you give pass[sic] $15,000 then you have the life time exclusion to fall back to which is limit of $5.6m." That's correct. He can gift you $5.6M without having to pay taxes. You just have to tell the IRS. – RonJohn Jul 5 '19 at 17:50
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    $50K is just shy of 23% of $220K, so you might not need a down payment. – RonJohn Jul 5 '19 at 18:10

This is not a normal transaction and the lender will be paying close attention to the money.

They will insist, as all lenders do, on an appraisal; but don't expect any leeway. If the comps for the house sold for $200K, then expect them to hold fast to that number. They are concerned because the decision to buy by you is the belief that you are getting a $220K house for $170K not that you are making a fair arms-length offer.

They may also be concerned about getting a home inspection. They want to know that there isn't a major issue which would would make it hard for you to get the repair done, and prevent your from making the monthly payments.

That $50K gift also concerns them. They will want to know that there isn't a side deal that involves you paying back that gift. Expect your brother to have to sign paperwork swearing it is a gift.

Note that if this deal happens, then the sale price is $170K, and that is what will be used later to determine if taxes are owed when you sell it years later.

The closing cost issue won't go away. Make sure you know all the numbers. Some items have to be paid: appraisal, recording fee with the local government, lawyers, title insurance. That money has to either come from one of the parties, or included in the mortgage which makes it harder to keep the mortgage at or below 80% of the value to avoid private mortgage insurance.

  • you have a lot of good points, but my concern is the taxable on the $50K gift that I'm receiving to pay for the down payment. you probably right that i have to pay the closing cost – Addiction006 Jul 5 '19 at 20:00

Gift tax is paid by the gift-giver, not the person receiving the gift. So you will not pay tax on the gift for sure.

The question might be if your brother would have to pay gift tax, as he probably would expect you to pony up for it. However, there are tax-free gift limits for siblings, so he should be fine:
The first $14,000 of the $50,000 gift would be covered by the annual exclusion; the remaining $36,000 would count toward the lifetime exclusion ($5.49 million)

  • Aren't the tax-free gift limits for _non_siblings siblings $15K for 2019? So siblings ae liable for gift tax while nonsiblngs get a freer ride? – Dilip Sarwate Jul 5 '19 at 21:19
  • @Dilip, in the U.S., the tax-free gift limits are not dependent on the relationship between the parties. You’re right that Aganju’s number is out-of-date. – prl Jul 7 '19 at 3:56

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