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Richard, Tax Attorney
Category: Tax
Satisfied Customers: 55608
Experience:  29 years of experience as a tax, real estate, and business attorney.
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My 80+ year old parents have a vacant lot theyd like to give

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My 80+ year old parents have a vacant lot they'd like to give to me and my wife. In exchange, they'd like some cash flow or "payments" until their death - at which time the payments would stop and the property would be ours.

The tax value of the lot is $155,000.

According to my father, they'd like to achieve a cash flow similar to what they would have if they sold the lot and re-invested the proceeds into an annuity - 5% or 6%. My father is suggesting he transfer title of the lot to me and my wife and structure some sort of note that makes sense for everyone.

My question is concerning the best method for structuring this transfer. Should he put the property in a living trust? Should he sell it to me for $10 and do the note however we choose? What's the best way to achieve the goal and avoid unnecessary tax concequences?
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning. You could actually set this up as a private annuity where your parents basically transfer the title to you in exchange for payments to them for the rest of their life. The amount of the payments would be calculated using actuarial tables based on the value of the property and the age of your parents and estimated remaining lifetime. Then, at the time of their deaths, the payments automatically stop with no further obligations on your part. This also eliminates the property from being at risk for any of their creditors. The only downside here is the the basis will be the amount of your payments so if they were to die before you made payments equal to fair market value, you would not get the normal step up in basis that you would in a straight purchase or by inheriting the property.

An alternative would be to purchase the property for its fair market value with the title transferred to you now in exchange for a promissory note secured by a deed of trust. Then, upon their death, they could leave the note to you as an inheritance in which case it would merge because you would own the property and the note. There would be no tax consequences because Texas has no estate or inheritance tax and its far under the Federal estate tax exemption amount of $5,250,000 per person.

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Customer: replied 4 years ago.

Thanks for your help this morning. I have a follow-up question ...

Based on your suggestions above on how to structure the transfer of ownership and payout, what will the capital gains consequences be under either scenario for my parents? Their basis is about $45,000. Fair market value is $155,000.

You're welcome and thanks for following up. It's going to depend upon their marginal income tax rate.

For 2013, the tax laws concerning taxation of long term capital gains are as follows:

0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.

In addition, starting in 2013, capital gain income will be subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.

With the annuity, the gain is the sale price based on the annuity contract's current FMV at the time of its purchase less their basis. with the sale for the note, they could take advantage of the installment sale rules and report the gain over time as they receive note payments.
Customer: replied 4 years ago.

Thanks. So for the "installment sale rule", would their capital gains be realized at the start of the installment sequence, or would they kick in once they had received payments equal to their basis?

My pleasure. The gain reported for each principal payment would be the principal payment divided by the purchase price times the overall gain.