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My wife and I have rental residence in the name of our trust.

Put into rental 5-1-08 at...
My wife and I have rental residence in the name of our trust. Put into rental 5-1-08 at $73,612 for structure and $63,339 for land and we want to sell the home to daughter and son-in law for amount of the mortgage $97,000. Pitfalls?
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12/1/2010
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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BK-CPA :

Hello and thank you for your question.

BK-CPA :

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.

BK-CPA :

In some more obscure circumstances, losses may be lost.

BK-CPA :

You should note your ability to gift assets to people.

BK-CPA :

There are annual limits ($13K I believe currently) for making reportable gifts and lifetime limits ($1,000,000 I believe) for lifetime gifts.

BK-CPA :

Lifetime gifts are tied into estate taxes, and after $1,000,000 in giving, you may owe gift tax.

BK-CPA :

The sale/gift in this case is going to transfer your basis in the home to your children.

BK-CPA :

Only the equity in the home, after accounting for the mortgage, will result in that which could be considered a gift or sold.

BK-CPA :

The internal revenue code has some implications for assuming debt as partners in a partnership, etc., that should be considered.

BK-CPA :

(ie... you should also note that a jointly owned rental property is a partnership where Form 1065 generally needs to get filed).

BK-CPA :

The at risk limitations, basis limitations, passive loss rules, etc., should be further considered.

BK-CPA :

Losses and income on the rental should flow properly, as a family, to maximize everyone's benefit.

BK-CPA :

Estate implications, and any retirement implications, should also be considered for you and your wife. Perhaps a trust would be a good idea.

BK-CPA :

This is a bit to consider...

BK-CPA :

I'll hold off for a bit and we can start clarifying things as you see fit.

JACUSTOMER-q774nzfo- :

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?

BK-CPA :

Your basis in the home for tax purposes will generally be transferred to the kids.

BK-CPA :

The equity is the difference between the fair market value of the property and your debt secured by the property.

BK-CPA :

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.

BK-CPA :

IRC Sec 1250 may have some implications (relating to depreciated real estate and recapture provisions).

JACUSTOMER-q774nzfo- :

So at future date if they sell they will either have a gain or a loss against the basis created in 2008?

BK-CPA :

Correct... IRC 121 provides an exclusion for the sale of a principal residence.

BK-CPA :

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.

BK-CPA :

Periods of nonqualified use and dollar limitations would have to be considered if applicable, etc.

JACUSTOMER-q774nzfo- :

Thanks. A lot for me to think over.

BK-CPA :

If you come up with any other questions, I am happy to keep assisting you further.

BK-CPA :

This stuff can be tricky all things considered.

BK-CPA :

Thank you too!

BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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BK-CPA
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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