calmloki
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
So here is a puzzle for the tax and legal minds - I'll surely be running this past our tax person, but only after she's done quivering after the 15th. I imagine there is a way to write up what I propose, but if I'm wrong or proposing something grossly illegal I'd love to hear about it!
Gal and I (70) own our rental properties jointly with right of survivorship. A married 45YO; Bob, with 10YO son has helped with the rentals for years. We would like to benefit him now and in the future and decrease our rental involvement. Looking for all of us to benefit.
An agent with a 1031 client offered $765k for an 8-unit we own outright. 25% down, 4% interest, 10 year contract.
Instead of doing that I'm thinking that we sell Bob the 8-unit for $700k, no money down, 5% interest only loan, and have the contract state that any re-sale requires us to be paid off but also that at the time of the final seller's death, let's say Gal, the contract is satisfied or rendered null or transfers on death to Bob, so that at the time Gal and I both get dead Bob owns the 8-unit free and clear. With us being 70 Bob could have a contract that runs 10-20 years.
Our taxes at time of sale to Bob would be on depreciation recapture and any principal we receive. Unless the property was resold our principal received would be zero through the rest of our lives. We would owe taxes on interest we receive; $35k/year.
In 2019 the property had an income of $51k after expenses but before depreciation deduction. If Bob bought the property from us for $700k his interest expense each year would be $35k, leaving him $16k positive cash flow. If his depreciable basis was $600k (cost minus value of land)his annual depreciation on the buildings would be about $21.8K, leaving him with a taxable loss of $5.8k to write off against his other rentals.
If Bob chose to sell after our deaths would his sale taxes be based on depreciation recapture and capital gains over the $700k purchase price - even though he hadn't paid a dollar toward the principal? Bob would already own the property, so how would a TOD or satisfaction/nullification of the mortgage be treated. If he were inheriting a property he would get a stepped up basis, right? How would mortgage satisfaction/nullification be treated? I'm thinking no step up in basis.
In my mind this sort of means that we shift payment of capital gains taxes to Bob (which seems fair since he would have paid zero principal for a valuable property) and takes the tax paying onus from us, since we didn't get a dime in principal from it. We convert our rental property into an interest paying vehicle that becomes valueless to our estate (except for Bob) at our deaths - sort of what I imagine an annuity to be.
Please come up with problems you see, but understand that we are not worried about making $16k/annum less on the property than we currently do. We aren't concerned about Bob selling and possibly scoring a big profit 2 or 5 years from now. We do not want to manage property managers. The idea is to divest now but maintain some guaranteed income. Is what I propose a doable and legal plan?
Thanks all
Edit: of course we could be like Jeanne Louise Calment and live to 122 1/2 - watch out Bob!
"In 1965, aged 90 and with no heirs left, Calment signed a life estate contract on her apartment with notary public André-François Raffray, selling the property in exchange for a right of occupancy and a monthly revenue of 2,500 francs (€380) until her death. Raffray died in 1995, by which time Calment had received more than double the apartment's value from him, and his family had to continue making payments. Calment commented on the situation by saying, "in life, one sometimes makes bad deals."
Gal and I (70) own our rental properties jointly with right of survivorship. A married 45YO; Bob, with 10YO son has helped with the rentals for years. We would like to benefit him now and in the future and decrease our rental involvement. Looking for all of us to benefit.
An agent with a 1031 client offered $765k for an 8-unit we own outright. 25% down, 4% interest, 10 year contract.
Instead of doing that I'm thinking that we sell Bob the 8-unit for $700k, no money down, 5% interest only loan, and have the contract state that any re-sale requires us to be paid off but also that at the time of the final seller's death, let's say Gal, the contract is satisfied or rendered null or transfers on death to Bob, so that at the time Gal and I both get dead Bob owns the 8-unit free and clear. With us being 70 Bob could have a contract that runs 10-20 years.
Our taxes at time of sale to Bob would be on depreciation recapture and any principal we receive. Unless the property was resold our principal received would be zero through the rest of our lives. We would owe taxes on interest we receive; $35k/year.
In 2019 the property had an income of $51k after expenses but before depreciation deduction. If Bob bought the property from us for $700k his interest expense each year would be $35k, leaving him $16k positive cash flow. If his depreciable basis was $600k (cost minus value of land)his annual depreciation on the buildings would be about $21.8K, leaving him with a taxable loss of $5.8k to write off against his other rentals.
If Bob chose to sell after our deaths would his sale taxes be based on depreciation recapture and capital gains over the $700k purchase price - even though he hadn't paid a dollar toward the principal? Bob would already own the property, so how would a TOD or satisfaction/nullification of the mortgage be treated. If he were inheriting a property he would get a stepped up basis, right? How would mortgage satisfaction/nullification be treated? I'm thinking no step up in basis.
In my mind this sort of means that we shift payment of capital gains taxes to Bob (which seems fair since he would have paid zero principal for a valuable property) and takes the tax paying onus from us, since we didn't get a dime in principal from it. We convert our rental property into an interest paying vehicle that becomes valueless to our estate (except for Bob) at our deaths - sort of what I imagine an annuity to be.
Please come up with problems you see, but understand that we are not worried about making $16k/annum less on the property than we currently do. We aren't concerned about Bob selling and possibly scoring a big profit 2 or 5 years from now. We do not want to manage property managers. The idea is to divest now but maintain some guaranteed income. Is what I propose a doable and legal plan?
Thanks all
Edit: of course we could be like Jeanne Louise Calment and live to 122 1/2 - watch out Bob!
"In 1965, aged 90 and with no heirs left, Calment signed a life estate contract on her apartment with notary public André-François Raffray, selling the property in exchange for a right of occupancy and a monthly revenue of 2,500 francs (€380) until her death. Raffray died in 1995, by which time Calment had received more than double the apartment's value from him, and his family had to continue making payments. Calment commented on the situation by saying, "in life, one sometimes makes bad deals."
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