Tax Strategy: Gifted or Purchased

Detroit, Michigan
Starting Out
2moFollow

Tax Strategy: Gifted or Purchased

Antonio Martinez-Elizondo
Member since 2023 · 7 posts · 4 votes

Hey All! I wanted to get your opinion on a real estate situation.

My mom bought a house years ago for about $105k (owned outright). In 2020, we had a verbal agreement that she'd sell it to me on a land contract for $130k, and I gave her a $10k down payment. At the time, the house was worth around $160k, so we were both comfortable with the price.

Over the next few years, the market took off and now the house is worth around $215k. Since the value increased so much, I told her I'd pay her a little extra, bringing the total purchase price to $150k. After my down payment, I'd still owe her about $140k.

Now we're trying to figure out the smartest way to transfer the property. Does it make more sense for her to gift it to me, sell it to me, or use some other strategy? I'm trying to think through the tax implications, property taxes, depreciation, capital gains, and long-term wealth-building.

I would be keeping this home as a long term rental! 

Thank you for responses!

0Reply
98 views

3 Replies

Jump to latestLatest
  • Christopher Tile
    Accountant · Long Island, NY · Member since 2021 · 184 posts · 146 votes
    2mo
    Quote from @Antonio Martinez-Elizondo:

    Hey All! I wanted to get your opinion on a real estate situation.

    My mom bought a house years ago for about $105k (owned outright). In 2020, we had a verbal agreement that she'd sell it to me on a land contract for $130k, and I gave her a $10k down payment. At the time, the house was worth around $160k, so we were both comfortable with the price.

    Over the next few years, the market took off and now the house is worth around $215k. Since the value increased so much, I told her I'd pay her a little extra, bringing the total purchase price to $150k. After my down payment, I'd still owe her about $140k.

    Now we're trying to figure out the smartest way to transfer the property. Does it make more sense for her to gift it to me, sell it to me, or use some other strategy? I'm trying to think through the tax implications, property taxes, depreciation, capital gains, and long-term wealth-building.

    I would be keeping this home as a long term rental! 

    Thank you for responses!


    This might be a little more complex than what you were thinking, which is a great reason to search for answers here at BP. Being that the purchase price is sub 200k, we don't want to overcomplicate things, but it's worth talking through for educational purposes...

    Definitely need some more information, but that 2020 land contract may have already counted as a "sale" back then at $130k IF you took possession and acted as owner...even though it was verbal. Assuming not, for a rental it comes down to basis:

    Gift - Mom owes no tax now, but you take her basis (~$105k). Lower depreciation and her built in gain transfers to you. 

    Sale - Mom pays capital gains, but your basis is what you pay (~$150k) = more depreciation for you (higher cost basis) + less future gain. An installment/land-contract sale spreads her gain over the payment years.

    THE BIG QUESTION     - Was this ever Mom's primary home (lived there 2 of the last 5 years)? If so, a sale is likely best. Under the primary residence exclusion, she could let her exclude up to $250k of gain... Which would result in her paying little to nothing AND you get higher basis.


    *NOTE - if she gifts it to you formally, or sells below market value, she will have to file a gift tax return for the year. No tax due, just reporting the gift and a reduction of her lifetime exemption. *

    0Reply
  • Antonio Martinez-Elizondo
    OP
    Member since 2023 · 7 posts · 4 votes
    2mo

    @Christopher Tile

    Thanks for the detailed reply!

    Yes, it was my mom's primary residence for well over five years, and she just moved out last year. Im just now able to take possession.

    My main reason for asking was actually the property tax side of things. My plan is to keep the home as a long-term rental, so I was trying to weigh the benefit of taking over her cost basis if that would allow me to keep the lower property tax assessment. My understanding is that when a property is sold, it's typically reassessed, which could increase the annual property taxes. I was trying to figure out whether the long-term savings from lower property taxes might outweigh the benefits of a higher tax basis and additional depreciation.

    Thanks again!

    0Reply
    • Christopher Tile
      Accountant · Long Island, NY · Member since 2021 · 184 posts · 146 votes
      2mo
      Quote from @Antonio Martinez-Elizondo:

      @Christopher Tile

      Thanks for the detailed reply!

      Yes, it was my mom's primary residence for well over five years, and she just moved out last year. Im just now able to take possession.

      My main reason for asking was actually the property tax side of things. My plan is to keep the home as a long-term rental, so I was trying to weigh the benefit of taking over her cost basis if that would allow me to keep the lower property tax assessment. My understanding is that when a property is sold, it's typically reassessed, which could increase the annual property taxes. I was trying to figure out whether the long-term savings from lower property taxes might outweigh the benefits of a higher tax basis and additional depreciation.

      Thanks again!


       You are right. Property tax implications are by state though, so I'd research the implications depending on the state in which the property is located. 1) Does it reassess on change of ownership... 2) Any parent/child exclusion... 3) Does #2 apply if it becomes a rental?

      Might be worth a call to the county assessor's office to confirm the reassessment rules in the state/county the property is in.

      0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free