House sale to a relative

[Stormy Kromer]

Almost 40 years ago my father & I bought an 80 acre farm that included a house & modest building site. Father passed 4 years ago and now I am the owner.

My 25 year old son would like to buy the house & building site portion, it accounts for about 6 acres of the 80 acre total. He would live there as his primary home. I would keep the remaining farmland and continue to rent it to a local farmer, that cashflows nicely.

I had the whole farm (80 acres with house and buildings) appraised in 2015, the appraisers comments were that the buildings added no value to the farm, and in fact it would be worth more of the buildings weren't there at all and it was all farmland. The farm was appraised at a little over $6,000 per acre. If I were to sell the entire 80 to a big farmer they would likely tear down the buildings and farm over them.

I would like to sell the house and buildings since they produce no net income. I let a neighbor live there rent free just for taking care of the place and paying the utilities. I would actually be money ahead if I would give the building site away for free to DS, but I know the IRS has rules about that and I want to be fair to our other child. Plus, my son wants to buy it and assume ownership, he wants to earn it himself.

My question is two part. First, in valuing the 6 acre building site do you think I could use the 2015 appraisal and value the building site based on the price per acre and the 6 acres that the building site is on ? EG: 6 acres @ $6,000 per acre = $36,000. Or, do you think the IRS would require a new appraisal on just the building site since it is a sale to a relative ? I really don't want to pay $1,500 or more for another appraisal. The farm just across the road sold for $6,000 per acre earlier this year, so that figure is still accurate.

Second question. I would be selling the place to him on a 30 year contract for deed with $0 down. I know that I have to charge a certain interest rate for the IRS. I don't know where to find what that rate is ? I was thinking of just looking online for the average 30 year rate and using that.

I would appreciate any advice or suggestions from the forum's experience. Thank you.

 

[pb4uski]

It sounds like that between the recent sale comparable and the 4 year old appraisal that you have a reasonable basis to support a value of $6,000 per acre. However, that $6,000 per acre is for farmland, so I think a case could be made that the 6 acres that you are selling to your son are worth $36,000 less demolition and disposal costs for the building. Another data point to be considered would be the property tax appraisal.

I presume that if you sell it to your son that you would have $30k+ of capital gains to contend with.... you might be better off to just give it to him and keep finding a way to even things up with your other child in the back of your mind.... your son's basis would be your basis in the 6 acres and buildings and if he later sells any gain would be tax-free if he used it as his personal residence and met the requirements.

The other advantage of giving it to him is that an appraisal becomes less critical... you just need to adjust your basis for the basis transferred to your son. You'll need to go back and figure out what your basis is in the land and then your son' basis would be 6/80ths of your basis in the land plus your basis in the building. Again, the basis is moot as presumably if/when your son sells it would fall under the personal residence exception.

While you might be able to do some fancy footwork and gift it to him over a number of years to slide under the $15k annual exclusion amount*, it might be easiest to just do it once and file a gift tax return reporting the gift even though no tax would be due.

*perhaps value the whole at $30k and gift 3 acres to him on December 31, 2xxx in some sort of document and gift the remainder to him on January 1, 2xxx+1 in a similar document and then record the transfer of the 6 acres in early January 2xxx+1.

 

[euro]

If your 2015 appraisal was an actual appraisal by a third party appraiser (not just a tax reassessment by your county tax office - a very different thing but often confused), I would think you will be in good shape with the IRS.
As far as the interest rate, what you are looking for is the AFR (Applicable Federal Rate). This is determined monthly and depends on length of loan and amount, etc. currently, it sits around 2.75% for a 30 year note but google it to make sure or see the investopedia link below.

https://www.investopedia.com/terms/a/applicablefederalrate.asp

 

[Aerides]

I agree with pb on this one, for the hassle of figuring it out, and maintaining a payment arrangement.... if you can swing it, it would make a nice gift to your son to get him started. Assuming he's not irresponsible? but then you would not be considering the sale to begin with.

 

[calmloki]

I would actually be money ahead if I would give the building site away for free to DS, but I know the IRS has rules about that and I want to be fair to our other child. Plus, my son wants to buy it and assume ownership, he wants to earn it himself.

How about the son pays 1/2 the property value into an account for the benefit of the other kid and you gift each kid $15k worth of property? No tax as it's under the IRS gift limit, the buyer earns and pays for his new property, and the other child is gifted at the same time, rather than waiting years or decades? Is that a doable thought?

 

[Stormy Kromer]

Thanks everyone for the responses, all valuable.


I don't need the money from the sale and was planning on setting up a separate investment account at VG and using it to make gifts to each child in equal amounts over the years as needed.


It is very important to DS that he buys the property. He is very independent and doesn't want a gift of any kind. He values pride of ownership and I respect that very much. He bought a house two years ago and has about $30k equity, that would be used to update the farm house.

 

[kgtest]

I would vote gift it to him over the course of 2 years. Have him take out a 15k loan if that isn't too much work... then just pay it off after year 2 gift.

You could gift 15k Dec 31st and 15k Jan1st 2020 if that makes sense. Has the loan for less than a week...might get some sort of tax break, otherwise just a small amount of interest for some legitimate paperwork and then that CFD filed with the county listing his purchase price. Bank has a record, county has a record, and you and son have record...IRS will keep to themselves with that.

 

[Aerides]

Could you do something where you setup your own payments to him over, say 5 or 10 years, and then just quick-deed it over to him after it's done? Much like a private car sale?

Sounds simpler than going through the mechanics of official financing - unless it's worth it to him for credit history. Might be worth a quick chat with someone who does actual real estate legal stuff. I'm sure there are others here who have something close to direct experience.

 

[kgtest]

credit lansdcape may have changed but it's funny I never had any credit myself except the homes I bought... The CFD with ole man did slow my ability to get "good credit card offers" but absolutely did not at ALL hinder my ability to be pre-approved WAAY above county appraised values of my subsequent home purchases. As long as you can show income the bank will finance like wild...the credit card issuer's took a little bit of time for me to build that up. I last year finally cracked 800 FICO and I've bought sold homes, financed multiple properties at once...DW has never been on a home note, and has had 800 for a few more years than me and she is younger. So the credit fico scoring system is totally garbage in my opinion and cannot be the only gauge of credit worthiness. Good lenders will hear that argument all day.


Don't let credit hinder any real estate transaction.

 

[OldShooter]

A few hings:

A contract for deed is an installment sale where the gain comes in little pieces with each payment. So you don't have worried about being whacked. And your gain is only what you get above the stepped-up basis when your father died, so it's not a big deal anyway.

In our state, a parcel like this will be appraised as two parcels; one is the farmland and one is the residential buildings and adjacent land. If you have not looked at the country appraisal I'd suggest doing so. It's almost certainly available on line.

Re picking a value, I used to have a CPA who opined: "If you don't get audited once in a while, you're not trying hard enough." He & I tried pretty hard but I never got audited. YMMV, of course.

You should run your ideas by a good CPA, not just SGOTI. Then have them implemented by a good lawyer with documents recorded just as they would be if this was an arms-length transaction.

 

[tryan]

another slant on calmloki ... Have kid #1 make payments for 1/2 the property value to kid #2.

Each years payments would be below the gift limits ... no taxes.

 

[OldShooter]

another slant on calmloki ... Have kid #1 make payments for 1/2 the property value to kid #2.

Each years payments would be below the gift limits ... no taxes.

Unless the OP's estate is huge/above the Federal exclusion @ $10M++ there will never be any Federal estate taxes due. State taxes may vary.

There really aren't any gift limits or gift taxes. The Federal threshold is the simply the point where a gift must be reported and counted against the exclusion, but no tax is involved.