Cash Out Refinancing a Gifted Home?

Question

Currently my father owns a property that he is looking to give to my sibling and I (used as a rental). We are looking to cash out refi the home so we can use the money to invest in other ventures (real estate investing, stocks, other businesses). What things are there to consider? Our plan is:

• 1. transfer property via quitclaim deed
• 2. clean up property and address minor property issues
• 3. appraisal/cash out refi
• 4. hire a property manager to manage the property

I've read of a seasoning period, but is there a way around this? Maybe if we setup an LLC and all three of us have equity/stake in the business?

Also, looking to speak with an estate planning attorney but wanted to square away as much info on my end in the meantime.

Note: we will be handling funds through a separate account and treating it as separate than personal finances.

Jaysen Medhurst · Answer

Yeah, have the conversation with the attorney (and a good CPA) sooner rather than later, @Jonny Dee. The rub is going to be how FMV of the property compares to the $15k allowed to be gifted tax free (i.e. your dad can gift you and your sister $15k each in any given year). For example, if the property is worth $200k, there's going to $170k of "gift." You and your sister are going to be responsible for taxes on that. Since this is a non-arms length sale, it's likely to get extra scrutiny.

*I'm no CPA.* There are some strategies to minimize this. If your dad, you, and/or your sister are married, the numbers can increase.

Most lenders require 6 months of seasoning before a refi with a new appraisal. If your dad's house appraises for $200k, he gives it to you (with the relevant tax consequences) a lender may be willing to lend on that $200k before 6 months. Worth having the conversation.

Jaysen Medhurst · Answer

@Jonny Dee, if your father gives you something (in this case a house) and it's value exceeds $15k, then you will owe taxes on the difference. Your father giving you the property is the taxable event.

Jonny Dee · Answer

Hey @Jaysen Medhurst, are you referencing a gift tax that is incurred from selling the property?

Of course we will consult with a CPA, but would love to hear about what you are referencing.