Sale of residential property

[JT2307]

A client came in and wanted to know how to handle turning house in Delaware over to son. When they purchased it they lived in it for a couple years, then rented it and then their son moved in and has been living there for the past ten years.

Taxable event?

Ideas. Thank you



A

[Lion]

If son has not been paying FM rent, personal use and taxable as a sale of a second home. Don't forget the depreciation allowed or allowable.

[Roland Slugg]

It's unclear what the taxpayers are planning to do. The title of your post is "Sale of residential property," but then you go on to say that your clients plan on "turning [the] house...over to son," implying a gift. You also didn't say if the son has been paying fair market rent, less than fair market rent or no rent at all. If you wish to clarify these vital facts, you will get more useful responses.

[JT2307]

Let me clarify

He doesn't know what he wants. He wants his son to have the house - and get benefits from owning the house - FMV of the house is $180,000. His first thought was to hold a mortgage for his son and then gift him and his wife $14,000 each and reduce the mortgage by that amount.



My thoughts were to have him turn the house over to his son - but then he threw in that he rented it a few years. The son has not been paying rent just pays the utilities.

Not sure where I want to go with this.

[Nashville]

Nothing comes from Nothing

He doesn't know what he wants. Not sure where I want to go with this.

I don't know how this kind of thought could be worse for you as a tax preparer. I'm thinking you will have to be the solution for this guy.

My interpretation of him not paying rent for 10 years, is this is not a rental activity, nor intended to be. It is virtually nothing, and I don't even
think the concept of "allowable" depreciation enters into the activity. Just a second house that a family member lives in.

I would donate a fractional percentage of ownership for several years, until the FMV of $180,000 has been reached at $14,000 per year. It might help if the guy was married and the donor wished for daughter-in-law to be co-recipient. That would serve to double the annual gift limit. This may require several repeated documentations annually, but I've seen this happen several times (although not as long as 12-13 years).

Basis is the FMV at time of transfer, or donor's cost, whichever is lower, if a sale or rental is contemplated. And of course, if a sale, parent cannot deduct the loss but can pass on the foregone loss to the son in terms of the son's basis.

Forgive the personal aggrandizement, but I notice that this is my 1000th post. Qualifies me to be a "grizzled veteran." Doesn't qualify me as being smart.

[Lion]

Don't forget that the OP said that the clients rented the house before their son moved in, so they will have depreciation lowering their basis.

[JT2307]

Would it be a taxable event?

So if he decided to turn the house over to his son and his wife for $1 - since it is the second house would there be a taxable event? Or would that be considered a gift?

Nashville - I don't know how gifting the house little by little would work with the deed - would have to ponder that some more.

[Burke]

Transfer of ownership for less than FMV (i.e, $1) would be a gift. TP could do this and file a gift tax return. No tax due and if his estate is less than $5.2M at death, well then, no tax due later either. Basis transfers from TP to son at donor's basis, but he then owns the house and can refinance, deduct all the usual taxes & interest. If and when son meets 2 out of 5 rule as personal residence, he could sell later and shelter taxes depending on his ownership percentage. The prior depreciation couldn't be much if it was only rented "for a couple of years." You don't say whether he is married or not. TP could also go the mortgage route as you outlined, and forgive principal over the years.

[JT2307]

Thank you

Thank you - I will give him a few scenerios and he can decide what he would like to do.

[JON]

Info

Is or has the son been paying the mortgage?? Look up there is some information about the parents helping family member on the purchase - I do not remember, but made some things easier. Obviously if their is a mortgage?CD involved that would get down the gift portion intially and the $14,000 comes off of the CD(interest).. What is the FMV?

10 years son - I think you want it as the parents second residence, unless they are already using one...

Jon