How to transfer property from relative without capital gains

9 Replies

My mom is turning 90 this month and is no longer interested in a 7 unit building. I want to take it over but the capital gains would be 50k. Upon her death it passes without CG and transfers with a $0 basis.  I want to upgrade the units (cir 1974) to increase rent and improve the quality of tenants. 

I am considering a master lease and a letter of understanding with my siblings to keep the building at its unremodeled value when it transfers, and will buy them out at that time. I am a 66 yr old retired General Contractor and would like to get the remodeling done while I still can.

Any ideas?

No, upon death there is a step up in basis.  

Are you actually purchasing the property from your mom or is she just giving/ transferring the property to you.  Unless you are actually buying the property you do not have to pay capital gains.  You are transferring the property from a family member.  There is no capital gains on that.  You will be responsible to pay the capital gains when you sell but not on the transfer.  In fact she will be able to write off half of the value of the house on her taxes as a gift to you.  (I am not an accountant so double check all this but I am pretty sure on it.)

My CPA mentioned to me that if you take title to the property before she passes you will lose your step up basis. If property is in a trust and she passes and property goes to you then step up basis is in affect. Whatever else you want to put in the trust/will with how the property should be handled in the mean time is up to you and her. I’m not a CPA and I’m sure there is more to what I’m telling you so look into this, but I do remember my CPA telling me that transferring property into a family members name before death wiped out the step up basis benefits. Double check it.

At death it is inherited at the market value at date of death so no capital gains. You could get a contract written now agreeing to something like right of first refusal. If you want to reno and own now your best bet is A lawyer... since you have siblings your issue is keeping them ok with the deal.

I am a CPA, but you should contact your personal CPA to make sure that you explain all the details to make sure they assess your situation correctly. That said, a few individuals above mentioned that you get a step up in basis at the date of death. This is true. What does this mean. The day your mom would die, you would want to get a FMV of the property. The FMV then becomes your basis in the property. Therefore you would depreciation the new basis over a 39 year life (falls under commercial at this point) excluding the value of land.

Each situation is different, but passing property or other assets at the date of death are great ways to pass on valued items while getting a step up in basis.  However in your mothers case we step into the area of estate planning.  As of current laws today (i know there were proposals but they are not law yet), if her net worth is not more than 5M then there could be some different planning to be done.  If that value is not close to 5 M then setting up an agreement with all parties so that you get the property at the date of death might be best (please consult with an attorney on the agreement).  

If you get the property as a gift, then you inherit her basis or the FMV at the date of gift. It is a lesser of the basis or the FMV. In real estate, a lot of times the basis will be the lower if it has been held for a while. So if she has owned it for a long time, then her basis might be minimal or close to zero. If you would ever go to sell it you would have a large capital gain. Now there are options to post pone this tax, but it would depend on the tax laws when you sell the property.

If you buy it from your mother, then we get into a little more complicated issue. Not saying it won't work, but you would fall into a related party issue. It would potentially only affect your mother. If the sale produced a gain then she would report and pay on the gain. If it reports a loss she would not be able to claim the loss. However the sale needs to be at an arms length deal. It would be advised to get an appraisal on it (potentially two to truly show its an arms length deal but thats for you and your CPA to decide) to show you are buying it at FMV.

Once again, please consult with a CPA that specializes in tax planning, because each scenario is different.

Thank you all for your time and ideas.

My faux pas on $0 basis, I meant the opposite. Yes its fully depreciated. 

I have been beating on this for months with CPA and lawyers. I hoped this community might have an insight we haven't thought of.  

Phillip, it is in a trust. Waiting is the best option, but I am hesitant to put alot of money into something I don't own. Plus the law or CG rate could change by then. Her mom lived to 94, her grandma, 98. She does volunteer 6 hr days twice a week. Thanks 

@Phillip Weickert A 7 unit residential building is "commercial property" for depreciation?? Residential use, is residential use, no?

I'm in a similar situation now and there's definitely no way to pass property on without paying capital gains between relatives. Someone will have to pay them at some point unless you wait until they pass.

If you haven't already, something you might look into is an irrevocable trust. There's a quite a few details to it so you should definitely speak with a lawyer who does estate planning (and who ideally is also a real estate investor so they can structure it in a way that is beneficial for your goals).

Wayne you are correct. It's the 27.5 years

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