Transferring properties

8 Replies

My mother is nearing the end of her working life and wants out of her 3 investment properties. I want to began my investing career at this time. Ideally I would like to have the properties transferred to me and I would return an income stream off the cash flow to her to pay her back for the properties. That being said, I won't follow that method if the gifting of the properties to me would have a large negative impact on her taxes. Thoughts? Location is Wisconsin

If you inherit them no taxes unless she has a "large" estate. About 5million I think. She can deed them to you but then you miss out on the stepped up basis when you sell, unless you 1031 exchange them. Or you can buy them and she can owner finance. 

Side note I try to hit Iola in July for the car show.

I'm not familiar with the stepped up basis? I would probably just roll them into bigger multi family properties but never hurt to learn something new...

The car show is great! Except we become outsiders in our own town! But it's great for the community and the cars are amazing so it's well worth it!

Do a proper seller-financed sale or wait to inherit them at then current market value when she passes.   Pre-death transfers are a mess with huge potential tax consequences.

Are these $5k houses in the hood or $150k houses @Aaron Barrett ?

Seek competent estate and tax advice for sure!

I always feel bad for locals during events, but let them enjoy our money we blow. 

If she deeds you the property then you will be at her basis, lets say she paid $25,000 years ago and now its worth $100,000 you sell it out right you get taxed on on the 25k she paid instead of the profit over the 100k, now if her net worth is under 5 million she can use some of her uniform estate tax credit to not have gift tax. But if she is selling them to you just have her owner finance and let her enjoy the income. 

also if you use the tax credit then make sure you talk to an estate planning attorney as I am not a attorney, nor do I play one on tv, and I know I didn't stay in a holiday express last night, lol

@Steve Vaughan The properties are all in the $50k-$70k range. I want to make the transition as easy as possible and don't want to get into a mess so maybe seller financing may be the best option. She wants out and I want in without completely sabotaging my personal finances as I have other goals besides real estate.

There are a number of moving parts here.  On the one hand you have quality of life decisions.  She does not want the property management headaches, etc.  On the other hand you have financial and tax decisions.  They do not usually work nicely together. 

Generally, from a tax perspective, the best strategy is for her to keep ownership of the properties so that when she passes you will inherit the properties at a step up in cost basis.  This means that the capital gain taxes, depreciation recapture taxes, etc., all go away.  However, if she gifts you the properties, then you also receive her current cost basis.  This means that she has essentially gifted you her capital gain and depreciation recapture problems. 

Perhaps she retains ownership of the properties but contracts with you to manage the properties so that she gets rid of the headaches but you could still inherit the properties and receive the step up in cost basis upon her passing. 

@Bill Exeter Thank you for the advice. However, I'm not willing to wait 20 years to completely own the properties so I plan to do seller financing. As an evolving question if she sells them to me for less then their value wouldn't she/I be taxed the difference?

Generally, the fair market value is what a willing buyer will pay and a willing seller will accept as payment for the property.  The only time there would be an issue is if the IRS could demonstrate some sort of tax avoidance structure involved.  If she sells it to you for less than the current value, then you have an immediate capital gain that you would have to pay tax on should you sell the property and cash out.  If you buy it under an installment note (seller financing), she will be responsible for the depreciation recapture in the year of sale and then some or all of the capital gain would be deferred over the term of the note. 

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