I have a friend who I am purchasing an investment property from at the same price they paid for it but the appraisal value is about a 1/3 higher than what I will pay for it. Will the seller owe gift tax on the difference? I am in the U.S. and the investment property is in a Colorado LLC.

  • Also, is the seller related to you? – littleadv Oct 7 '13 at 0:48
  • I am US and the investment property is in a Colorado LLC – BCecil Oct 7 '13 at 0:49
  • No the seller is a friend – BCecil Oct 7 '13 at 0:50
  • I do not believe that your friend would be liable for gift tax. Many people are unable to sell their houses for the amount that the house is appraised for (or their cars for less than the "blue book value") but must perforce sell for a lower price. I doubt that they are required to file a gift tax return! – Dilip Sarwate Oct 7 '13 at 2:03
  • @Dilip there's quite a difference between unable and unwilling. 30% discount over the appraisal is quite a lot, and I would definitely suggest getting a proper advice before going into such an adventure. – littleadv Oct 7 '13 at 2:43

If the sale is at arms length, then no gift tax is due because that would be the fair market value (FMV).

If however the friend can sell it for more, but chooses to give you a discount - he might be liable for gift tax.

Also, if the sale is at loss (and it sounds like it is from what you describe), the seller might not be allowed to deduct the losses to the extent of the discount given over the FMV.

I suggest taking this up with a Colorado-licensed CPA or EA for a proper tax advice. This is a tricky situation, and you (and especially your friend) may find yourself in some trouble later if you do that without a proper legal and tax counsel.

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  • OP said seller is selling at same price he purchased. So he'll have a 'profit' , and have to pay tax on recaptured depreciation. No loss. – JTP - Apologise to Monica Oct 7 '13 at 3:53
  • @Joe its investment property, and there might be passive losses.. But you're right, most of it might probably be the depreciation recapture. – littleadv Oct 7 '13 at 4:31
  • Thanks so much for your help, I will contact a CPA in CO Cheers – BCecil Oct 7 '13 at 15:30

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