Author Topic: Parents buying out 50% of my property- tax implications?  (Read 378 times)

beachbumwithyarn

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Parents buying out 50% of my property- tax implications?
« on: September 08, 2017, 12:36:09 PM »
Hi all- I'm fairly new here and learning a lot.

I have a beach place (please don't tell me how anti-FI that is. I know). I asked my parents to become 50% owners (my mom has been looking for awhile and never quite found what she wanted, but wanted something just like mine).  They are seriously considering it.

Here are the stats:
Purchase price- 215K
Remaining balance on mortgage- 105K
Current market value- ~240K

The most likely scenario is they pay the remaining balance of the mortgage (with any adjustments to get to 50%).  I spoke with a real estate lawyer who mentioned I might have to pay capital gains tax. 

So, first question- I don't need to pay CG right??  I'm not selling an asset for more than I paid for it.  I'm selling them half of what I paid for a 50% interest in the property.

Which leads me to my second question- Is their percent ownership (their investment/purchase price) or (their investment/market value)?

My third question- We wouldn't want to treat it as a gift, because my parents would be taxed at a 30% tax rate. Meaning, they can't just give me the money to pay off the mortgage.  I can't transfer the mortgage to them.  Do we need to treat it like a sale?

The process of getting their names on the deed is relatively easy and cheap.  It's the movement of the money that I'm not sure about, and what the best way is to go about it.

Canadian Ben

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Re: Parents buying out 50% of my property- tax implications?
« Reply #1 on: September 08, 2017, 12:57:10 PM »
I'd go and see your bank.

Explain the scenario, and let them tell you the penalties, fees, options.

There's going to be a lot of paperwork. This is extremely dependent on which bank you're with, and your + the beach house location.

GizmoTX

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Re: Parents buying out 50% of my property- tax implications?
« Reply #2 on: September 08, 2017, 12:57:44 PM »
Look into creating a Family Partnership & transferring your beach property into it; your parents would then buy 50% of the partnership, either up front or over time. This is a clean way to structure ownership & document how operating expenses & property taxes will be paid going forward, how the partners divide their time at the place, & what exit strategy you want. I would value the property by a fair market evaluation of what you could sell it for today. Of course your mortgage holder has to agree to any change of ownership.

In any event, you should be asking an attorney knowledgeable about tax & property issues in your state.

dleavitt

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Re: Parents buying out 50% of my property- tax implications?
« Reply #3 on: September 09, 2017, 04:06:13 PM »
Preface: you really should talk to a real estate attorney, estate attorney, and a CPA knowledgeable in this BEFORE you make any agreements.  It is always cheaper and easier to do things right the first time.

First re: Capital Gains.  You may have capital gain depending on what your adjusted basis in the property is.  If your parents are buying 50%, then your proceeds for tax purposes would be 50% of the FMV of the property at date of sale (any difference between 50% FMV and cash/benefits received would be a deemed gift as this is a related party transaction).  You would offset the $120k with 50% of your basis ($107.5k) resulting in a net gain of $12.5k.  That is assuming 1)that your basis is your purchase price listed in your post and 2). you have not taken depreciation.

Their investment would be 50% of the market value, though as I mentioned you can gift them the difference between the mortgage balance and 50% FMV (though you still count the full 50% FMV as proceeds).

Your parents could gift easily without any tax with either proper reporting or proper planning.  Assuming you are married and your parents are as well, $56k could be gifted in 2017 without tax or reporting and another $56k in 2018.  Since we are so close to the end of the year this could work well.  If they want to gift the full $105k in 2017, they just need to file a Form 706 gift tax return to report it.  Unless they have already used up their estate exemption there should not be any tax.

EDIT: I should note that if you go the gift route your parents would not have an equity interest in the property, which seems to be the intention of this hypothetical.  If they "gift" you money to pay off the mortgage and then you "gift" them equity in the property that could raise some red flags, though I must admit that this particular area is outside of my expertise.
« Last Edit: September 09, 2017, 04:09:54 PM by dleavitt »

beachbumwithyarn

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Re: Parents buying out 50% of my property- tax implications?
« Reply #4 on: September 10, 2017, 03:09:17 PM »
Thank you all, this is extremely helpful.  To clarify- I have spoken with a real estate lawyer and I have an appointment tomorrow with my tax guy to discuss all this.  But I am trying to be as knowledgeable and prepared as I can be and make sure I ask him the right questions.

I knew the gift limit was 14K but I didn't realize each of us could receive 14K from each of them.  That's intriguing.  We did want them to have interest in the property though.

Thanks again. 

Proud Foot

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Re: Parents buying out 50% of my property- tax implications?
« Reply #5 on: September 15, 2017, 02:34:51 PM »
I can't offer any help in answering your questions. What is our reasoning for selling them 50% as opposed to renting to them or letting them use the space?