My parents have a rental property that they are trying to sell in Pennsylvania. They currently live in Idaho, but are going to be moving in a year or two to Arkansas or Missouri to find a place to retire.
I currently live in Kansas City and I am trying to start my portfolio, but I just graduated from college and I am trying to pay off my student loans.
Would it be smart for my parents to invest in a house in Kansas City when they sell their current house (in Pennsylvania) to avoid taxes and then sell it to me when they are ready to move into a house they would like to retire at?
You will need to check to see if they can 1031 exchange a property to you. My guess is that because you are related, this won't work. Maybe @Dave Foster might have some thoughts to share.
Welcome to Bigger Pockets Jeff, my wife and I actually live in Northwest Arkansas but invest in KC. Just a few questions for clarity:
Would your parents be selling the Pennsylvania house and 1031'ing into a KC rental? Or would they be living in the KC house they purchase with proceeds from the Pennsylvania sell? I'm not too familiar with all the rules of a 1031 but I don't believe you can 1031 an investment into a primary residence. If they 1031 into another rental, that could help them defer taxes but they'd eventually pay those taxes when they sold the new place to you. However, I'm not sure selling to you eventually would pass the smell test of an arm's length transaction. You and your parents would probably want to seek advice from a lawyer or 1031 expert.
@Cameron Pendergraft I would try and work something to where they did use a 1031 into a KC rental. They would then sell it to me when they officially moved and found a property they wanted to buy in Arkansas. Maybe talking to a Lawyer in KC would help! Do you have any recommendations?
@Cara Lonsdale Thank you for the information!
Unfortunately for you but fortunately for me, I do not have a referral as we haven't needed one yet, knock on wood. We just got to 3 units so we're just starting to get our wheels spinning. Feel free to reach out if you ever have questions.
@Quinten Sepe has a monthly BP meetup in KC he arranges so any questions you have or referrals you need could probably be met by attending one of those, as well as asking here on BP.
@Jeff Smalley They could sell the one in Pennsylvania and 1031 into another rental in KC, and "rent" it to you. But if they then sell it again to you, they would be liable for those taxes. So basically, there is not a way for them to avoid the taxes on it if they sell. They could 1031 into a small MF and let you live in one of the units for free as the PM/LL and therefore benefit you and also them to save taxes and continue getting cashflow into retirement. When they sell their current home in Idaho they should get that tax free since it is their primary residence and then use those funds to buy their retirement home.
You will want to talk to CPA, but I think what you could do is have them sell there house in Pennslvania and 1031 into the KC property. They could sell the property in KC to you or also simply rent the house in KC to you and list you as the inheritor. I think that would avoid pretty much all the taxes, even though that will hopefully be a long time off in the future.
@Jeff Pavalone , Thinking strategically it's certainly fine for your parents to do a 1031 into a property near you. It would need to be used for investment. So either it is rented to others or to you but it would need to be arms length.
It is possible that they might be able to sell to you and then do another 1031 into another property. But related party rules add some unwieldy criteria in order to avoid any charge of basis shifting.
What might be a better plan is to skip the middle step and simply 1031 into a very nice investment property in Arkansas. Then in a couple of years they could simply convert that property into their primary residence for retirement.
Jeff, PA is the only state that will not recognize a 1031 exchange. Taxes will need to be paid on the state portion of this deal.
Sell the rental house right now in Pennsylvania and 1031 exchange it into a future retirement home in Arkansas or Missouri. Rent the retirement home for a couple year. Then in a couple years, sell their personal residence in Idaho and gains are tax free. Then move into their rental house in Arkansas/Missouri. This strategy allows them to totally avoid taxes.
Buying a property for you to move into gives them no tax benefit. They will pay capital gains when selling to you, unless the plan is to sell under market as a way to "transfer wealth". Be a little careful if that is the plan.
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