"Sell" property to spouse?

Question

I'm wondering if there are any tax implications for "selling" a property to my spouse and want to verify if there is a certain order I need to do accomplish things in to make sure it goes smoothly.

I have 20 rental properties with title and mortgage in my name only, 10 with conventional financing, 10 with a portfolio loan.  I'd like to "sell" my spouse 10 with the portfolio loan so she can get conventional financing on all of them.  I know there is a six month seasoning requirement for non-arms-length transactions so planning to get a portfolio loan for those 10 in her name only on the loan and title.  After the six months, refinance to a conventional mortgage for each of them.

I read over IRS publication 544 and found a section about not being able to deduct losses which shouldn't be an issue as they have appreciated, but it also mentioned owing taxes on gains.

Questions:

• Since between spouses, do I need to pay on gains and depreciation recapture?
• Can I do this in one transaction or do I need to add her to the deed first and then refi?
• Does it make sense to just add both of us to all the deeds and then just get the mortgages in one name?  Is that easy with conventional?
• My property management company would issue two 1099s, one for each of us, do I combine rent/expenses for the year per property, do do I need to list properties twice to ensure the 1099s match?
• Anything else I'm missing in this process?

Thanks

Michael B. · Answer

Thanks @Jeff Copeland and @Dave Foster.  I've already talked with my lender who is fine with it as we are closing out my mortgage as part of the process.  I just wanted to verify things as I would expect my wife to now get the 1099 for income in her name instead of mine as in years past so wasn't sure if that would raise any issues on my taxes.

Jeff Copeland · Answer

@Michael B. - Regardless of tax implications (as stated above, there may be none), you may not need to remove yourself from the deed. Just add your wife to it at the closing of the refinance.

This is something to speak to your lender about, and it may vary from lender to lender.

Dave Foster · Answer

@Michael B., if you and your wife file a joint tax return then a change of name on deed between the two of you will not change the tax payer/reporter for the property.  The tax payer is the return that reports the activity of the property.

Your issue is more a lender issue.  I would first get your lenders permission to deed over under the current portfolio loan.  and have her pursue new financing.  That might simplify things from that perspective although I suppose it could impact the LTV ratios available to her.

Michael Skoczylas · Answer

There is a lot of complicated issues here. Under IRC 1041 any transfer between spouses will not generate any gain or loss. The basis transfers, and no gain or loss will be recognized. I believe most states will exempt this from transfer tax because the transfer is between Husband and Wife, but that is something to look into as well. But on the Federal Tax side, no gain or loss will be recognized or realized.

Michael B. · Answer

Thanks @Jeff Copeland, I realize my post might be a bit too much info, but that's basically what it boils down to in the end.

Is adding my wife to the deed (both of us on it at that point) and refinancing in her name to pay of my mortgage considered a sale?  Can you do this same day or does it need to have any seasoning period?

If I add her and remove myself from the deed is that a sale?

If it matters, we do file joint taxes.

Jeff Copeland · Answer

This is a complicated question that you should ask of your CPA. There's not enough info here (and even if there were, it's too complex for anyone to give sound free advice here).

For example:

Are you married - filing jointly on your tax return? If so, what would this accomplish?

Are you in a community property or common law property state?

That being said, the sale of a property is normally a taxable event (barring a 1031 exchange or other tax shelter), whereas the refinance of a property is not.

And you might be over-complicating this anyway: If your goal is simply to qualify for conventional financing (because you already have 10 Fannie/Freddie loans in your name), then you may be able to work with a lender to put the loans in your wife's name, and simply add her to the title at the closing of the refi(s), avoiding this hassle altogether.

"Sell" property to spouse?

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