Parents Want My House, a real thinker!!!!!! - Posted by Kyle

Posted by Ronald * Starr(in No CA) on July 01, 2002 at 20:40:06:

Dave–(FL)------------------

You have a rough memory of the situation. A little rough for relying on, in my estimation.

For one’s own home, there is a capital gains exclusion of up to $ 250K per individual owners, $500K for a married couple, of the gain – profit – on the sale of the house. Any return of the original investment and subsequent amounts spent to fix up the property are returned without capital gains taxes. This is only for one’s own house. Where one has lived for at least 24 months during the 60 months prior to the sale date.

Kyle, being an investor, and not having lived in the house, is not eligible for this capital gains tax exclusion. If he makes a profit on the resale, he will pay ordinary income tax rates on the profit.

Good Investing************Ron Starr***************

Parents Want My House, a real thinker!!! - Posted by Kyle

Posted by Kyle on June 30, 2002 at 16:40:47:

I need some help guys. I know there’s a thousand ways to structure the deal, but would like some opinions on the method which you see as the best. I bought a great house for a rehab and have almost finished the project (it was a monster, but came out great!). My parents now want the house and we would like to work out a way that benefits us both (no holding or realtor costs for me, weeee whooo! 1st payment due aug 1st.)

MY HOUSE
My total cost (with buying and selling factored in): $183K
FMV: $220K- $230K (I don’t want to be greedy)
My selling price: $200K

THEIR HOUSE - owned for more than 2 years so capital gains is NOT an issue
Owed: $135K
FMV: $185K

My questions/issues:
Best way for me to reduce capital gains?
Best way for me to reduce my parents closing costs?
Should I sell it “subject to” But they wouldn’t be able to reap the tax benefits?
1031x? We could set the deal up to where there home was more valuable, so my capital gains were reduced…???
Give as a gift? Not that fimilar with this one?

We are basically open to anything…I need some cash out of the deal and they want the house

Suggestions please.

Thanks,

Kyle

Re: Parents Want My House, a real thinker!!! - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 01, 2002 at 20:35:15:

Kyle-------------

Kyle, Dave T has already given you some accurate advice. Quick turn property: ordinary income, no capital gains treatment, no 1031 tax deferred exchange, no installment sale treatment.

When they sell their own home they can take out all the profit, after paying off their mortgage, with no federal capital gains tax. The exclusion is up to $250K per individual owner, $500K for a married couple.

There is not much profit anyway, so I suggest you just give the house to your folks for the total investment you have into the property–$183K. I’m sorry, since you will make no profit, there is no income tax to be paid. Better luck next time.

Now, since your folks love you, there is always the possibility that they might, completely independently of the property sale, of course, they just might give you some gift of cash. Just out of love.

Anybody can give a gift to another person of up to $11K in any calendar year and there are no federal tax consequences–at least no tax for either side to pay. Now, it used to be $10K a year, and I think $11K is the correct amount this year, but I urge you to consult an attorney, CPA, the IRS, or possibly the internet to verify this. I am not any of those individuals or entities.

Any one person can gift to any other one person $11K. If both your mother and father were generous, they could gift you up to $22K in one year. Not necessarily all at the same time. If you are married, they could gift a similar sum to your spouse. All tax free.

I believe that the result of this generousity is that their lifetime exclusion from the federal estate tax is reduced by the amount that they give away. The lifetime exclusion is something like $1.1 or 1.2 Mill these days, I think. Again, if you want to know more about this sort of thing, you should not rely on my memory, but consult professionals or the tax laws.

I don’t know the rental rates in your area, but in most of the country their old house would not make much sense as a rental property. There would be too little income to pay all the expenses of the property and provide a profit, on a cash flow basis. However, they might want to check out rental rates for similar properties, just in case that appealed to them. It is possible that rental rates are high relative to the value of the properties in your area.

Sorry you will not be making any profit on this first venture. Maybe you will do better in the future.

Good InvestingRon Starr****************

Re: Parents Want My House, a real thinker!!! - Posted by Dave FL

Posted by Dave FL on July 01, 2002 at 07:10:56:

Correct me if I am wrong, but don’t the gains taxes kick in only after the house is sold for more than 500K? I though I saw that somewhere…

Thanks,
Dave FL

Re: Parents Want My House, a real thinker!!! - Posted by Dave T

Posted by Dave T on June 30, 2002 at 20:08:52:

Q. Best way for me to reduce capital gains?

A. I assume that you are referring to capital gains taxes here. Under the scenario you describe, you will not have any capital gains taxes on the sale of this property. Instead, your profit will be fully taxed as ordinary income in the year of sale. To reduce your taxes, reduce your profit – that is, sell for less.

Q. Best way for me to reduce my parents closing costs?

A. Offer to pay all closing costs for your parents. If your parents are able to assume your loan, this may present the cheapest financing cost for your parents.

Q. Should I sell it “subject to” But they wouldn’t be able to reap the tax benefits?

A. You could sell “subject to”, but you would still be liable for the mortgage loan. In a subject to deal, you deed the property to your parents while you keep the mortgage in your name. Your parents, in turn, make your mortgage payments on your behalf. In so doing, your parents have all the rights of ownership and are entitled to all the tax deductions a homeowner is normally entitled to. When your parents decide to sell the property, your remaining loan balance is paid from the proceeds of the sale.

Q. 1031x? We could set the deal up to where there home was more valuable, so my capital gains were reduced…???

A. Under the circumstances now in effect, your property does not qualify for a tax deferred exchange under the provisions of section 1031 of the Internal Revenue Code. The profits on the sale of your property will be fully taxable as ordinary income in the year of sale – even if you use an installment sale to facilitate the transaction.

Your parents still retain their ability to exclude the profit on the sale of their house under the two year rule for the sale of a primary residence.

If you are considering exchanging your property for their house, you may have some taxable boot to look out for unless the debt on the two properties is equal. Often, before participating in a tax free exchange, one party will refinance their relinquished property to make the debt on the relinquished property equal to the debt on the replacement property. This may avoid taxable boot issues.

However, since your property does not currently qualify to participate in a tax deferred exchange, this discussion is purely academic.