Logically, someone has to pay the taxes, it just doesn't go away. I'm not a lawyer nor accountant, but I think birth mom or you (if deeded to you) would be liable. I would think she can't deed it until taxes are paid?
@Calvin Rankin Highly recommend you and your wife speak with both an attorney and a tax CPA/EA before you do (or promise to do) anything.
Why willingly make someone else's problems your problems? And...why help her perpetuate a felony (tax evasion)?
Eeek. I wouldn't touch that transaction; if California has adopted the UFTA, that not only is a transfer not-for-value, but also a transfer to an insider, and should be rescindable, whether you keep it or wholesale it. Also, because you *know* there are owed back taxes on it, a semi-decent prosecutor can probably argue conspiracy and have you charged with the same felony as the mom.
The IRS is sometimes *very* slow to move; but once they move it's like an avalanche and you don't want to be on the receiving end of their collections arm / prosecution arm.
Check with a lawyer and CPA in your state just to be sure. But, that sounds a high-risk low-reward behaviour.
@Calvin Rankin if it was unpaid property taxes, it would be tied to the deed and that could block a sale. Since it is income taxes, it would require the IRS to come after her and put a lien against the property. It it hasn't happened yet, there is probably low risk.
Technically speaking she will be responsible for depreciation recapture on the sale, even though she never claimed depreciation. That means, even if she sells it for $0, she will still have taxes due on sale on top of the unpaid income taxes. Whether the sale will trigger anyone to come knocking is anyone's guess. The lower the dollars of the transaction, the lower the likelihood.
Many things like this go undetected by the IRS. The problem is if the owner gets caught and implement you, it could implement you in a scheme to fraud the federal government. That could result in punishment that is way worse than any potential gain here. I don't think it is worth the risk for you.
If I was her, I would find a wholesaler to buy the property and take whatever they offer. I would take my chances and the belief that the IRS has bigger fish to fry. If she is contacted by the IRS, it is important that she remains silent and directs all conversation to her attorney.
@Calvin Rankin , I agree with those here suggesting that you avoid this transaction. The difference between you wholesaling this and others wholesaling or buying the property is your knowledge and their lack of knowledge. Since you're well aware of the potential issue (and have confirmed your knowledge here), you can be implicated for any role in non-disclosure of potential issues in this transaction.
Honestly if you have to ask you already know the right answer. If you don't then it is beyond your skill set anyway.
Why even consider being involved. Pass, the deal is not worth the effort or risk.
I am neither an attorney or a tax professional. So take this advice realizing it is coming from an RE investor and not a legal/tax professional.
I see lots of good responses but the responses are missing one option to consider. Have her contact a tax professional to look into negotiating the tax payment on her income taxes. Without penalty/interest, I suspect the income tax is probably small because of the depreciation of the structure. Income is the rent - annual depreciation of the structure - any other expenses that went into the owning/maintaining of the RE. The tax professional could negotiate on any penalty/interest. This option has the advantage of all of the options that I have seen posted in that it actually addresses the problem (no income taxes paid).
I have made a significant amount of money via RE and have legally paid very little taxes on that money. The depreciation and the expenses reduce the taxable income significantly. It helps that I use a very good tax professional that can determine the legal write offs and provide direction to reduce future taxes.
Looking into paying the owed tax is at least worth evaluating as an option. The other solutions leave your mother-in-law delinquent on her taxes.
You have nothing to gain here and a LOT to lose
you should be very suspicious, of both her motive and ineptitude.
Don't be a hero, just run away
Originally posted by @Jason D. :
@Calvin Rankin so, I'm not a CPA or Attorney, but her income taxes aren't tied to the property, so those taxes can not transfer to you. If it were property taxes, that's a different story, but the income taxes are her personal debt.
Incorrect; IRS is king. And since OP is likely an "insider" under the fraudulent transfer laws, the IRS can likely rescind the sale and also possiby stick OP with a conspiracy to commit tax fraud prosecution (especially, considering, he admitted to it being not above-board here on BP).
LOL, I don't usually spend the time to read long posts, but you had me at "the birth mom is a very shady person". I really have nothing more to add to this one...