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Updated over 3 years ago on . Most recent reply

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Annie Balagot
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Need help with creative structuring

Annie Balagot
Posted

Hi Bigger Pocket Experts. I'm trying to help a friend while also trying to make what I think is a really interesting deal for me.  My friend's elderly parents live in a senior facility and has been renting their prior home out for a few years (in Carlsbad/San Diego) but now it's a big hassle for my friend to manage and they just want to sell. however, this home is worth ~$1.3M but their basis is something like $200k. I told her not to sell as the house basis will step up at the time of their death, then they should sell. But she doesn't want to deal with it now and needs cash to help pay for both parent's care. So, here is what I'm thinking - looking for reactions about this plan.

1) they continue to hold title to the property but agree to rent the house to me for $0.

2) They borrow $250k from me at 0% which comes due after the parent's passing (when they sell the house).

3) I can sub lease the house to a third party at $5k per month (or more).

4) We set up an option contract where, say within 6mths of both parent's passing, I have the option to purchase the house at an agreed upon price ($1.3M) and they pay 0 capital gains taxes.

So, I see it as a win-win. My friend gets cash today to help pay for parent's care and does not have to worry about managing the property and can eventually sell the house and save at least $100k in taxes (assuming $1.3M sales price - $200k basis - $500k exemption = $600k taxable gains * 15% federal + CA taxes)

I get a property I can rent out $60k per year w/0 financing costs so assume 50% expenses = $30k/yr which is a 12% cash return. I may be able to rent out even higher so that's all upside. And, i have the option of purchasing the house in the future at a fixed price and I get my $250k back (would that be an infinite return then?), which I can use as the down payment to buy or if the market drops, I don't have to buy it but i would expect San Diego pricing to continue to increase.

Does this make sense? would this work? any problems you see? What are the risks? Thanks for any feedback!

  • Annie Balagot
  • Most Popular Reply

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    Twana Rasoul
    • Real Estate Agent
    • San Diego, CA
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    Twana Rasoul
    • Real Estate Agent
    • San Diego, CA
    Replied

    @Annie Balagot Seems like they'd be better off to rent the house out at market rent (it seems like thats not happening right now) and that may possibly enough to resolve their issue for funds if the home is grossly under market rent.  Also, they can hire a property manager to manage the home if they feel that they can't handle it.   If they still need additional funds they can look into a cash out refinance...they'd be better off this way than paying 24% interest on that $250k they'd be borrowing. ($60k/year/$250k)


    Also, the property would not get the 500k exemption since it has been a rental for several years and their entire gain would be subject to capital gains tax as well as having depreciation recapture.  

    • Twana Rasoul
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