Have Tax Questions? Ask a Tax Expert for Answers ASAP
Hello and thank you for your question.
There are rules for when you are selling something to a related party. In general, losses may be deferred until the related party sells the property later in life, or depreciates the property if using it in a business, etc.
In some more obscure circumstances, losses may be lost.
You should note your ability to gift assets to people.
There are annual limits ($13K I believe currently) for making reportable gifts and lifetime limits ($1,000,000 I believe) for lifetime gifts.
Lifetime gifts are tied into estate taxes, and after $1,000,000 in giving, you may owe gift tax.
The sale/gift in this case is going to transfer your basis in the home to your children.
Only the equity in the home, after accounting for the mortgage, will result in that which could be considered a gift or sold.
The internal revenue code has some implications for assuming debt as partners in a partnership, etc., that should be considered.
(ie... you should also note that a jointly owned rental property is a partnership where Form 1065 generally needs to get filed).
The at risk limitations, basis limitations, passive loss rules, etc., should be further considered.
Losses and income on the rental should flow properly, as a family, to maximize everyone's benefit.
Estate implications, and any retirement implications, should also be considered for you and your wife. Perhaps a trust would be a good idea.
This is a bit to consider...
I'll hold off for a bit and we can start clarifying things as you see fit.
In view of todays real estate market if I assume there is no equity in the property (proven how?) and gift it to my daughter and son in law who will then use as principal residence. My wife and I have then taken it out of rental status at the time we gift it to daughter. Potentially then no tax impact positive or negative to my wife and I?
Your basis in the home for tax purposes will generally be transferred to the kids.
The equity is the difference between the fair market value of the property and your debt secured by the property.
Your tax basis and your equity are not the same as a side note, with an appraisal being one of your best options for establishing the fair market value at the time of the gift.
IRC Sec 1250 may have some implications (relating to depreciated real estate and recapture provisions).
So at future date if they sell they will either have a gain or a loss against the basis created in 2008?
Correct... IRC 121 provides an exclusion for the sale of a principal residence.
There are restrictions on who qualifies, but in general, the home must be used as a personal residence for 2 out of the last 5 years leading up to the sale.
Periods of nonqualified use and dollar limitations would have to be considered if applicable, etc.
Thanks. A lot for me to think over.
If you come up with any other questions, I am happy to keep assisting you further.
This stuff can be tricky all things considered.
Thank you too!