Minneapolis Lawyer familiar with elderly asset protection and RE

12 Replies

My father and I purchased a property 2 years ago cash. At the time of the purchase the property was deeded solely to his name. I would like to now transfer the deed to an LLC, in my name, while doing a cash out refinance so my dad can pay some of his bills. I know their is a plethora of legal and tax concerns. I'm looking for someone who can help navigate this territory. In the end I would like the property in an LLC owned by me without implicating a tax "gift" and I would like the new debt to be an expense to the rental property. Any suggestions or contacts would be much appreciated.

@John Woodrich would be a good place to stay for the tax implications you will also need an attorney and if you truly want to finance in an LLC you will need a portfolio loan which I can help with. There are pros and cons for finacing in an LLC.

Thanks for the mention @Tim Swierczek .

@Jon Loca  you mention that you and your father purchased a place for cash but it sounds like he may have purchased it himself...  If you both paid cash you technically created a partnership, should have been filing a partnership return, and both of you should have been picking up the income...  Guessing this isn't the case but if it is you could get a loan and purchase his interest.

Otherwise, assuming he purchased the property, owns it free and clear the easiest thing would be for you to talk to @Tim Swierczek about getting a conventional loan and purchasing the property from your father. The interest would be deductible, you could title it in your LLC, and you would meet your goals. The purchase should be at arm's length, if it isn't you could trigger gift tax consequences which may or may not be an issue. If your father doesn't have a taxable estate the cost of doing this would simply be filing a gift tax return to report the gift, no gift tax would be due. Feel free to message me if you would like to discuss further.

[I'm not an expert in this kind of planning, unfortunately. I know the LLC mechanics, but tax is still a bit above my head.]

Hey @John Woodrich - from tax perspective, do you have an opinion one way or the other if @Jon Loca did the following:

  • Dad deeds property over to LLC, for "consideration less than $500" to avoid hefty deed tax when recording.
  • Dad invites his partner-son to become a small part-owner of the operation of the business that is this rental property by buying into the LLC for "services to be performed"
  • Lender like @Tim Swierczek helps get the property refi'd under the LLC, with cash distributed pro rata to the owners -- does that get ordinary income, or capital gains treatment? (Dad gets $$ for bills, but pays cap gains rate on it, right?)
  • Then, over the course of years, Dad yearly "gifts" the legal maximum ($14K?) to son in equity of the company (so ownership percentage, and therefore share of future distributions, grows without(?) any tax consequence).

What did I miss in terms of taxable events? Does it impact it if Jon becomes an owner after the cash-out refi? Does this potentially solve the problem?

@Tim Joyce your plan is good however if he wants to get a loan on it he will have to report the sale and pay some deed tax.  Not a big issue in the grand scheme of things.  He could strategically put together a plan like this but if I had to guess it won't matter.  The federal estate tax exclusion is high so most people aren't subject to it.  MN is a little different but it may also not be an issue.

Overall their would be no tax cost if his dad doesn't have a taxable estate.  He could gift the annual gift exclusion however the gift tax return should be filed every year to report that gift otherwise there is no proof of him using the exclusion.  If there isn't a taxable estate it would make sense to report any gift in one year as it is cheaper to file one return than many claiming the annual exclusion.

Need more information to figure out whether the issues are worth addressing further.

Yeah @John Woodrich I see what you're saying about estate tax maybe being non-issue. I see a potential for a large event on Jon's side here, when he either gets the property or the company that owns the property. Once the equity is cashed-out and there is just a smaller amount left, that might be the time to set up a kind of equity vesting schedule, where in return for son's services managing the property, dad releases some of his ownership over to son. (sorry for impersonal writing - law school habits die hard) The periodic tax burden of receiving more ownership over time would still fall to son, but in smaller chunks and perhaps(?) offset by company depreciation losses.

@Tim Joyce I link your outside the box thinking but in this situation I think it is best to keep it simple as his only concerns seem to be tax consequences at this point.  There are many ways to structure this if they have additional motives.

@John Woodrich The property is deeded to him but we split the income, he gets 75% and I get 25%, that's how we've been reporting it on our taxes the last 2 years. The one concern if I buy the property from my dad he would have to pay capital gains tax around 50K. We were all into the place for 100K after purchase, rehab, and closing cost and it would appraise around 150K today. 

@Tim Joyce I really like the idea of converting the equity to my name on a schedule 

Not to sound to grim, I thought that when he passes he could give the property to me or my sister (All his assets are in this property and his primary residence) without a tax implication. However, reading that 50% of people require some sort of long term care and that's not included in medicare, I figured it was prudent to protect his one asset in that scenario so he could qualify for Medicaid, but it doesn't sound like there is a way of passing the property without triggering some tax rule

Originally posted by @Jon Loca :

@John Woodrich The property is deeded to him but we split the income, he gets 75% and I get 25%, that's how we've been reporting it on our taxes the last 2 years. The one concern if I buy the property from my dad he would have to pay capital gains tax around 50K. We were all into the place for 100K after purchase, rehab, and closing cost and it would appraise around 150K today. 

@Tim Joyce I really like the idea of converting the equity to my name on a schedule 

Not to sound to grim, I thought that when he passes he could give the property to me or my sister (All his assets are in this property and his primary residence) without a tax implication. However, reading that 50% of people require some sort of long term care and that's not included in medicare, I figured it was prudent to protect his one asset in that scenario so he could qualify for Medicaid, but it doesn't sound like there is a way of passing the property without triggering some tax rule

Ignoring the past - there are no tax consequences to him if he were to gift the property to you.  He would have to file a gift tax return to report the gift but there would be no gain on the transfer.  You could then take out a loan and gift him money each year up to $14,000 per year to cover medical expenses if needed however interest would not be deductible as it was not related to the activity.  If you were to purchase his interest, your purchase loan interest would be deductible and depending on his income level, he may pay $0 capital gains tax.  May have some recapture to pick up though.

Not sure what his timeline is like but there are clawback rules related to gifting and getting on public assistance.  Something to consider.  Any money spent discussing with your tax adviser or attorney would be money well spent.

@John Woodrich "Any money spent discussing with your tax adviser or attorney would be money well spent." LIKE

Originally posted by @Tim Swierczek :

@John Woodrich "Any money spent discussing with your tax adviser or attorney would be money well spent." LIKE

We all like to save money and cut corners when we can, this is NOT a good place to do it!!!  :)

Thank you everyone for the input. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.