Real Estate Broker · Wilington, IL · Member since 2017 · 16 posts · 2 votes
Without being too specific, here's the scenario for a friend:
A young college student wants to buy an investment property; it's a small apartment building with 11 units. Since it's over 4, a commercial loan is required. Guess who doesn't qualify for a commercial loan with limited business history?
The result is that the LLC, which will own the property, ends up in the student's parent's name, along with the commercial loan since the student is ineligible (for at the time at least another 2+ years.)
When it comes time to refinance/sell/etc. how can the property belong to the student instead of the parent, without "rebuying" the property from the parent? Open to any all suggestions!
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
8y
@Kyle Cortez The parents can gift the property to the child. No taxes will be incurred as long as the property is less than the parents' remaining lifetime exclusion amount.
Otherwise, it will be a taxable sale.
There is a third option: student manages the rental and is paid to manage the rental. The payments will be ordinary (self-employment) income which will give the student income history (good for loan quals). If student never takes title and parents pass away, student will received a stepped up basis in the property at the time of death meaning that the student can then liquidate without paying a cent in tax.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
8y
@Kyle Cortez The parents can gift the property to the child. No taxes will be incurred as long as the property is less than the parents' remaining lifetime exclusion amount.
Otherwise, it will be a taxable sale.
There is a third option: student manages the rental and is paid to manage the rental. The payments will be ordinary (self-employment) income which will give the student income history (good for loan quals). If student never takes title and parents pass away, student will received a stepped up basis in the property at the time of death meaning that the student can then liquidate without paying a cent in tax.
Real Estate Broker · Wilington, IL · Member since 2017 · 16 posts · 2 votes
8y
@Brandon Hall, Thank you so much for the suggestions! Ironically, I just listened to your show probably two weeks ago or so and I learned so much from it.
Regarding the gift, does this need to be done after the commercial loan is either paid off or the student is eligible to acquire one in their own personal/own business name? I'm assuming there is something similar to a mortgage's due on sale clause.
They could potentially wait until the parents pass away, but there are siblings and the parents are only in their late 40s so that might be too long of a route.
Investor · Nassau County, NY · Member since 2016 · 82 posts · 43 votes
8y
Parents should be able to add student as an additional member of LLC. Then when appropriate parents resign from LLC. Depends on how LLC was setup, but that should work.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
8y
@Kyle Cortez the timing of the gift will be dependent on the facts and circumstances. Your questions are great, but not any that I can answer without specific knowledge of the taxpayer and the transaction.
@Carol C. resigning from the LLC is a gift of value from parent to student. Gifts can have unintended tax consequences if not adequately planned for.
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
8y
You should really speak to a CPA regarding the different scenarios of gifting. The parents can gift certain membership interests while still retaining control, or they can gift all membership interests. Furthermore, a discount for lack of marketability and lack of control can potentially be taken, thereby reducing the taxable gift. Too many moving pieces to give you advice on here. Consult with a professional CPA familiar with these rules.
Professional · Pella, IA · Member since 2017 · 16 posts · 22 votes
8y
@Kyle Cortez - If parents are comfortable with it, they could just lend their credit to the business, but let student own it. So, student forms LLC, LLC gets property under contract, parents lend money and/or credit through a guarantee to LLC (and co-signor on note with lender) with promissory note and mortgage (will be second position behind commercial loan) back to parents, LLC closes on property, student manages property and makes payments to commercial lender and parents (which would rapidly build credit for him and the entity), and onward they go. Major drawback, if LLC is primary borrower and student is sole member, might get beat up by commercial lender on rate/terms.