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Gifting rental house to kids?
Old 10-17-2013, 07:01 PM   #1
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Gifting rental house to kids?

Wife and I have a rental house she no longer wants to manage ...could we gift the house over a series of years to our two children to stay under the federal limits on gifting and continue to receive the rental income ourselves? More complex since the house is already fully depreciated? Clearly would need legal contracts.

Thoughts?
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Old 10-17-2013, 07:09 PM   #2
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good question I would like to know that also.
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Old 10-17-2013, 07:48 PM   #3
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My accountant told me that I could gift my son a $250,000 stock portfolio
if I wanted, without paying any additional taxes on it. Said I just needed to file a separate gift tax return. This surprised me, as I thought we had a max of $13,000 a year without additional taxes.
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Old 10-17-2013, 08:08 PM   #4
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13K (actually 14K this yr) is the annual limit if you don't want to report a gift. There is also a lifetime limit (I believe in the 5M+ range) below which you don't pay any taxes but you do need to report the gift. The lifetime limit is basically your exemption when you pass so you can you use it now or use it later or partly now and partly later.

You may want to think twice about gifting..........if property passed on death , its basis is stepped up to date of death value and heirs pay nothing in taxes if inherited. If they receive property as gifts, basis may be lower.........e.g. perhaps your basis.....and they
might end up paying taxes when they sell.
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Old 10-17-2013, 08:47 PM   #5
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Quote:
Originally Posted by kaneohe View Post
You may want to think twice about gifting..........if property passed on death , its basis is stepped up to date of death value and heirs pay nothing in taxes if inherited. If they receive property as gifts, basis may be lower.........e.g. perhaps your basis.....and they
might end up paying taxes when they sell.
Consider hiring them to manage it, pay them a cash fee which will be income to them and a property operating expense to you. You will still get whatever profit the house creates, and you can likely set up some incentive or profit sharing too, but this is beyond my knowledge. Leave the house to them in your wills.

Ha
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Old 10-20-2013, 08:00 AM   #6
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Good comments, all ....thanks.

In general, then, no one has heard of a mechanism like this, being used?

This would be ideal since would satisfy wife a bit, transfer the property and continue to receive income from it (our original purpose).
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Old 10-20-2013, 08:04 AM   #7
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Forgot to mention ....there would be little basis step up on this property ...while the depreciated value may figure into increased step up, the property itself may not appreciate much.
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Old 10-20-2013, 08:37 AM   #8
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Just wondering out loud if you could have them take over the management of the property and triple-net lease it to them for an amount equal to the tax depreciation. You would retain ownership but your rental income less depreciation would be zero. They would have rental income from tenants less operating costs less what they pay you in rent (equal to the depreciation). Any future improvements they could amortize as leasehold improvements.

Then when you pass they would inherit the property with a stepped-up basis for the excess of the fair value over the depreciated cost.

YMMV. You may want to talk with a CPA who specializes in taxes.
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Old 10-20-2013, 09:20 AM   #9
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If the rental property is passed to the kids (either through a deed change or upon death), upon future sale of the property, how would the depreciation recapture be reported? Just thinking out loud as I know the basis is lowered by the depreciation amount taken on rental property over the its life.
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Old 10-20-2013, 09:30 AM   #10
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Quote:

could we gift the house over a series of years to our two children to stay under the federal limits on gifting and continue to receive the rental income ourselves?

Isn't that what a revocable trust is used for? The xfer would be all at once ... but that shouldn't matter.
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Old 10-20-2013, 10:10 AM   #11
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Quote:
Originally Posted by kaneohe View Post
13K (actually 14K this yr) is the annual limit if you don't want to report a gift. There is also a lifetime limit (I believe in the 5M+ range) below which you don't pay any taxes but you do need to report the gift. The lifetime limit is basically your exemption when you pass so you can you use it now or use it later or partly now and partly later.

You may want to think twice about gifting..........if property passed on death , its basis is stepped up to date of death value and heirs pay nothing in taxes if inherited. If they receive property as gifts, basis may be lower.........e.g. perhaps your basis.....and they
might end up paying taxes when they sell.
It's true that (with current estate law) the fully depreciated rental property would receive a stepped-up basis upon death...but unless the OP and his wife have a $15MM estate, their individual $5MM estate exemptions would allow the rental property to pass estate-tax free, whether the property's tax value basis is $0 or $350,000.

So, from an estate valuation perspective, as long as OP's estate is < $10MM, it doesn't matter when they pass title on the property.

However, if the OP wants to still retain rental income, then they need to retain title on it.

Also, having your child as owner of the property while still taking the rental income exposes them to all of the hassles of possible litigation as the property owner, while giving them none of the financial benefit.
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Old 10-20-2013, 03:54 PM   #12
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Originally Posted by MooreBonds View Post
It's true that (with current estate law) the fully depreciated rental property would receive a stepped-up basis upon death...but unless the OP and his wife have a $15MM estate, their individual $5MM estate exemptions would allow the rental property to pass estate-tax free, whether the property's tax value basis is $0 or $350,000.

So, from an estate valuation perspective, as long as OP's estate is < $10MM, it doesn't matter when they pass title on the property.
There are 2 aspects to this:
1) Estate tax considerations.....generally it is fair to assume for most that there will be no estate tax w/ a combined 10M exemption
2) Capital gains for new owners......if gifted, basis is generally original owners' basis and therefore new owners will generally be more susceptible to capital gains taxes. If inherited w/ steup in basis, there will be no capital gains tax of if property is sold immediately after death of origina owner.
Inheriting is generally better from this aspect.
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Old 10-20-2013, 04:17 PM   #13
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Don't forget to talk to the kids about it too, before you do anything. They probably need to plan also.
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Old 10-20-2013, 06:48 PM   #14
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What kaneohe said...
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Old 10-21-2013, 02:39 PM   #15
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Sell it to them at Fair Market Value. Take back a Self Cancelling Installment Note. SCIN. Have someone who has done it before do the docs. Maybe in an independent transaction each year you could give them some cash under the limit.
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Old 10-21-2013, 06:44 PM   #16
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I think it depends on what your goal is.
If your goal is to get it out of your estate, then sell it to them per Z3Dramer's suggestion. Although with the Unified Tax Credit so high, I can't imagine this is your goal.

If your goal is simply that you do not want the hassle of managing it but still want the income for yourselves, I'd either pay your children to manage it or give it to a property manager to do so.

As Kanehoe said, cap gains will be better for them if they inherit the property.
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