legal ??? buy real estate from family member and sell at loss

6 Replies

Not sure if this is legal.  I don't want to do anything illegal.  I am just proposing a hypothetical and am wondering what people think.

My parents own a house in Ohio that they paid 230k for.  They moved to Florida a couple of years ago and bought a new house.  The Ohio house is now rented out.  What if I bought the house for 300k.  My parents held the note as interest only.  When they die (God forbid, but it will happen one day), they leave the house to me as inheritance.  If I then sold the house, but it only sold for $250k, could I claim a $50k loss?  Change the numbers around for different outcomes.  Again, just an interesting, hypothetical question.

Consult a lawyer or you might be on vacation...haha.

If you inherit a house it is on the stepped up basis so if you inherited and the date of death value was 250,000 that would be your value against you judge any capital gains when you sell.

 Your parents are depreciating the house now so that will impact their taxes if they are selling to you but they should look into that.  If you bought the house now I don't see if it would be any different from a house you bought from someone else. Dot the I 's  and cross the t's though. It is the kind of thing the government loves to look at.   A loss would be a loss and a gain a gain.  It is likely if they sold at an inflated  (not fair market) value you  would be questioned by the IRS on a loss.

Check with an accountant but what I understand is that you can purchase a house at any reasonable number and that will be your basis. If your parents carry the note and will it to you when they pass- that is a gift and might be subject to tax.

When you sell the house - your tax will be based upon your basis (plus any improvements) vs the sold price

I believe that If they charge below market rate on the loan i.e. 0% then the difference between that and market interest is considered a gift so check with a lawyer or accountant.

Originally posted by @Michael B. :

Not sure if this is legal.  I don't want to do anything illegal.  I am just proposing a hypothetical and am wondering what people think.

My parents own a house in Ohio that they paid 230k for.  They moved to Florida a couple of years ago and bought a new house.  The Ohio house is now rented out.  What if I bought the house for 300k.  My parents held the note as interest only.  When they die (God forbid, but it will happen one day), they leave the house to me as inheritance.  If I then sold the house, but it only sold for $250k, could I claim a $50k loss?  Change the numbers around for different outcomes.  Again, just an interesting, hypothetical question.

Why do you want a $50k (or large) write off? I like the way you are thinking ahead and one should always think about tax planning. I also like interesting hypothetical questions but there are so many other things to consider before you actually got a straight answer. Normally this line of thinking ends up in a tax avoidance (not approved) by the IRS, you would have to lie about something somewhere along the way to get some sort of benefit that is just not worth it...imo

Keep that mind churning though! There are tons of things on BP that could inspire you to make good money in real estate off of your own investing!

Bad idea, but just a couple of observations.

If you "buy it now" you won't inherit it, you already own it.

Your parents will pay tax on a minimum "imputed" interest.

If you don't pay the full mtg. when you sell it, presumably after your parents' death, the "forgiven" amount of the loan will be ordinary income.

Dream up something else.

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