Can ownership interest be converted to mortgage to avoid taxes?

3 Replies

Hi all, 

Here is my situation. Way back when my wife and I purchased our 1st house my in-laws helped with our down payment to reduce our mortgage. As such, my mother in law (father in law is deceased) now owns 17% if our property. We have now bought a new property and will move in after renovation. We will then sell our current property. My mother in law's 17% ownership has doubled in value from  $115k to $280k. Can the presumed capital gain of $165k be converted before sale next year into a mortgage secured by the property  to avoid taxes and have the secured property changed to our newly purchased property? 

@Jeff Pollack

You can buy the 17% and she can give you a note for the money but at that time it seems capital gains tax would be due. Not sure it helps taxes. 

You should be able to get the "home"sale tax deduction for most of the appreciation $500k. Check and see what your mother in law capital gain tax rate will be. Check with accountant and make sure what the basis in the house really is-any improvements, renovations, etc. 

Maybe you can see if mom in law can do something with gifting $14k to you, wife and kids but make sure your tax is less than her if you go that route. 

Maybe check with 1031 expert for any ideas. 

Good problem to have. 

@Jeff Pollack , if she's on deed for that 17% then there's not much you can do as @Carl Fischer pointed out.  It might be a 1031 candidate but I'd want her CPA to agree since her only documentation that she has held if for investment would be a motive of appreciation.  She owns part of a property that a related party lives in.  It doesn't generate rent for her, etc.  

I wouldn't say the 1031 angle is dead but she and her cpa need to go in with eye's open.

@Jeff Pollack

Let's clarify the intentions first. Your portion of capital gain is already $800k, of which only $500k is exempt, so $300k is taxable. If your mother-in-law's interest is somehow converted to a secured lien, than you'd be 100% owners. Such move will *add* her $165k to your $300k taxable gain. That is counter-productive.

Which leaves only a 1031 option on the table. One sticky issue here is the investment intent, as @Dave Foster pointed out. But before we go there, keep in mind that a 1031 will require that your mother-in-law remains a part-owner of your *new* house - something that may be neither desired (she is not getting paid) nor practical (complications of securing a new mortgage).

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