OT: Real Estate Advice - Gifting a Vacation Home

[BigRnj]

Given our well rounded board, any Real Estate or Tax SMEs out there? I’m looking for any insight/advice on how to arrive at the best approach involving the gifting of a vacation property.

The situation: my elderly FIL owns a vacation home (bought in 1988 and has appreciated nearly 3 fold). My wife and her sister (my SIL) are entitled to half of the property. The original plan was to settle with the final estate after my FIL passes (hopefully many years from now). However due to spiked real estate values, my FIL thinks now is the time to settle this portion of his assets. My SIL has no interest and wants us to buy her out. My FIL is willing to “gift” 1/2 of the property to us. We would then need to get a mortgage to cover my SIL’s half of the property (so the amount we pay would be 1/2 the value of the home and that amount would eventually go to my SIL).

The questions: Can my FIL essentially sell us a vacation home at 1/2 it’s appraised value? Since we plan to keep the property would there be a delay in paying capital gains taxes unless/until it is sold in the future? How does the 2022 $16,000 annual gift tax exemption and the $12.06M lifetime exclusion apply?

I know I have to engage professionals, but I was looking here to get any hints or advice on how to proceed to do this the right way while protecting all involved. Thanks in advance for anyone with experience or advice.

 

[GoodOl'Rutgers]

I have no idea but maybe it is possible for you to give FIL a reverse mortgage loan for half the value.. he give the money to SIL... and when he "leaves his house", you get it.

I'm sure there is a very smart way to do this out there... and maybe the states that the homes/people are in might matter as well.

(might I also suggest that housing prices may be TOO HIGH right now? and your SIL would be getting a good deal and you NOT if housing prices drop? Your FIL's urgency seems a bit odd)

 

[rutgersal]

There’s no advantage to settling this now, because on your father in laws death, your wife and her sister will assume ownership of the house at its stepped up value. (Whatever it’s worth at death). This will minimize your capital gains taxes once you decide to sell.

wheereas if you assumed ownership now, and sold later you would own capital gains tax on any appreciation from now till then.

Also, there is a limit on how much you can gift tax free.

the tax SMe you seek is called a cpa, whose advice you might want to seek out. But I’m sure the best course of action is to do nothing.

now if your father in law wanted to downsize and live on the proceeds from the house sale, that would be different. Yes, now would be the time to sell.

 

[WhichReligionIsRight]

Can your FIL add you and your wife to the deed?

 

[RUnTeX]

In theory, anything can be sold at any price, even for $1, especially between family members. It would just be categorized in the land records as a non-arms length transaction. As you know, seek the advice of a professional.

 

[rutgersal]

In theory, anything can be sold at any price, even for $1, especially between family members. It would just be categorized in the land records as a non-arms length transaction. As you know, seek the advice of a professional.

but that would not be advantageous because when they goto sell, they’ll owe taxes on the difference between the selling price and $1. That’s why it’s best for them to do nothing and simply assume the property at its stepped up price upon the father in laws death.

 

[rutgersal]

Can your FIL add you and your wife to the deed?

This is not advantageous because capital gains taxes would be owed on the amount between when the property was first purchased and the final selling price. (When you go to sell) The best way to minimize capital gains taxes is to assume ownership upon death, because you would acquire the asset at its stepped up value.

 

[robjknight]

Need to monitor possible tax changes. Their has been discussion by the current administration of eliminating the step up basis.

 

[phs73rc77gsm83]

He could sell it at 1/2 price but you’d be liable for the tax at fair market value. You may be able to use the gift exemption and file Form 709. I’m not a tax pro and this is just my opinion. You’d get a stepped up basis when he passes (assuming the tax law doesn’t change), which would be advantageous as suggested above. Talk to a professional, as you have written.

 

[mdk01]

When you talk to a professional and dig into details you need to resolve:

If it's 1/2 gift and 1/2 sale what are the capital gains implications? Is it no recognized gain for the gift 1/2 but no step up in basis for that half or is it deemed a complete sale with full gain recognition for income tax purposes with the new basis being the current FMV?

If it's fully gifted to your wife and SIL does her sale of her half to you trigger capital gains tax for her?

 

[dollarbill]

Your FIL thinks its' the time to sell. Your sister is willing to sell her half now. You're ready to step up to the other side of this transaction. I'd be real careful. That property could drop 30% or more in value real quick IMHO. I prefer to focus on the investment merits first and the tax consequence second. Good luck. $$$$

 

[rutgersdave]

When you talk to a professional and dig into details you need to resolve:

If it's 1/2 gift and 1/2 sale what are the capital gains implications? Is it no recognized gain for the gift 1/2 but no step up in basis for that half or is it deemed a complete sale with full gain recognition for income tax purposes with the new basis being the current FMV?

If it's fully gifted to your wife and SIL does her sale of her half to you trigger capital gains tax for her?

I had this situation with my father with his brokerage account. It was a joint account with his name and mine and I called customer service about the step up basis on the account. He believed that 1/2 account would have been taxable for capital gain because I shared the account which I agreed. I transferred the stocks to a new account with my father being sole owner and myself as beneficiary. When he passed, the entire account was step up basis with no taxable gain.

 

[rubaseball78]

Can you turn this into your primary residence? This would avoid capital gains.

The 2-out-of-five-year rule is a rule that states that you must have lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive and you don't have to live there on the date of the sale.

 

[rutgersdave]

You should find out why your FIL wants to transfer the house now. I know of a few older friends that own a vacation home that their family enjoys using but they are burden with the maintenance cost and property taxes. One had to renovate his LBI home after Sandy first class because his kids wanted it but they didn’t chip in for the cost. If the beneficiaries are willing to take on the cost and upkeep, I’m sure he would be willing to wait to pass on the house upon his passing.

 

[rutgersal]

Need to monitor possible tax changes. Their has been discussion by the current administration of eliminating the step up basis.

Not going to happen. There is too much to do, and republicans likely take the house in November.