Taxpayer wants to give rental townhouse to son

[Starman]

Taxpayer owns an unencumbered rental townhouse on which approximately 50% of original value is depreciated. Taxpayer would like to put son, who is now living in the townhouse, on deed as a co-owner. Taxpayer then wants to jointly obtain a home equity loan for the original amount paid which the taxpayer will keep the proceeds. The son will take the responsibility to pay back the loan; however, the liability will be with both parties. The Taxpayer will file a gift tax return for 1/2 of the FMV of the townhouse because this is not at "arms-length". The son presumably takes his share of the townhouse at the adjusted current basis (original basis less depreciation). My question is: since the Taxpayer is receiving proceeds for the gifted share of the townhouse indirectly through a loan, does the Taxpayer recapture the depreciation taken even though the taxpayer remains jointly and severally liable for the debt?

[Rapid Robert]

Taxpayer owns an unencumbered rental townhouse on which approximately 50% of original value is depreciated. Taxpayer would like to put son, who is now living in the townhouse, on deed as a co-owner. Taxpayer then wants to jointly obtain a home equity loan for the original amount paid which the taxpayer will keep the proceeds.

Will it still be a rental after all of this? Why is the son giving dad the son's half of the loan proceeds? (another gift tax return? reciprocal gifts, if there is such a thing?) What is he trying to accomplish, selling the property without recognizing any gain?

[taxea]

this is not a gift but rather a sale. the price is the amount of the equity loan that the son is paying. the tp would file a report the half of the property he is selling.

[TAXNJ]

This type of transaction structure seems to have many tax issues and potential problems if not structured properly. You might want to discuss other alternatives.

Could be wrong because you have more facts.

[Starman]

I'm replying to all three parties that have replied to my question on what looks to me to be a disguised sale. First I really appreciate the thoughts and answers. Now with the son living in the townhouse it will no longer be a rental property. I have researched several parts of this transaction. Putting someone on a deed of real property is a gift reportable on form 709 if the value gifted is in excess of 14K. The value of the gift to the son without the loan/sale involved would be 1/2 of the FMV. The gift basis in the hands of the son would be 1/2 of the adjusted basis of the taxpayer. The loan/sale of the townhouse gets complicated because both parties are on the deed and both parties are responsible to pay back the loan. On the face of the transaction it appears to be a loan which is a non-taxable transaction; however, the government may consider it to be a sale particularly when accompanied with a quit claim deed. The taxpayers intention is to remain a co-owner and pass her share upon death to the son. My opinion would be to either sell the entire property to the son and recapture the depreciation or pass the property to the son. Note that in PA if the son proceeds the mother in death, the mother will have to pay inheritance tax on the part of the property that she gifted to the son!

[Snaggletooth]

Mortgage Negates Gift

This is not a "no strings attached" gift when the mortgage is considered. Owner is giving away half the property for half the loan liability based on owner's original basis. If the loan were $14K less than what son is assuming, there would be a gift.

This might be a 4797 transaction if the conventional measurement after depreciation is considered results in a gain. Simply taking half of the loan proceeds does not by itself create a gain. Remember, with a related party, gains are taxable and losses are (at worst) deferred.