Renting house from parents & hoping to sell and share profits

2 Replies

Hi everyone - I'll preface by saying im a total newbie when it comes to real estate, but I'm extremely handy which is why I was able to work out this arrangement with my parents in the first place. I have some questions regarding my unique situation and I knew BP was the place to go for some help.

Long story short. I found a property in Kansas City, MO a few years ago in a great neighborhood but it was a foreclosure and needed a ton of work. I didnt have the cash to buy the place - so my parents who are real estate investors bought it.

The place needed a ton of work (new plumbing, new electrical, collapsed main sewer line, foundation issues, tons of cosmetic work, etc). So the arrangement was that I do a majority of the rehab over time (parents covering almost all rehab & material cost), in return I get a good deal on rent to live there (approx 30% below market rent rate).

Now after living in the place for about 3 years and fixing it up, I'm looking to move out and buy my own place. I'm hoping to work out some arrangement with my parents so that I could get a cut of the profits when they sell the place to help put towards a down payment on my own house.

Hoping the BP community could help me come up a with a way to structure a deal that could work out well for my parents and I. Specifically - how do I structure the deal to be appealing for my parents, while reducing tax liability for both parties?

Details of the house:
Kansas City, MO
Purchase price + Rehab cost so far: $185K ($115k purchase price in Cash + $70k rehab).
Approximately another $25K needed for additional rehab before putting house on the market. I would complete this before moving out.
Potential ARV: $360,000

House is in parents name - not an LLC, etc.
Parent will use profits to buy additional rental properties, and I would use my cut for down payment on my own home. So with a 1031 exchange that would avoid capital gains tax, right?

How would they be able to share 30-40% of profit with me while avoiding gift tax? Is there some other creative way we could structure this deal? Appreciate any help.

@Trent Wright If your parents treated that property as an investment then the 1031 would be an option and it would allow them to defer tax on the gain.  But giving you a share of the profit will be taxable to them.  And that would certainly dilute the benefit of the 1031.

One suggestion would be for your parents to use the 1031 exchange and make one of their purchases a nice investment property that they rent to you.  Each year they can use their annual limits to gift to you part of the property or return any rent to you that you pay during the year to keep it arms length.  In that way you get your cut and a great house over time.  Your parents hold until they pass and then you get the step up in basis so the tax disappears and you inherit it tax free.