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Old 03-16-2015, 03:25 AM
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Posts: 2
How to buy out parents' interest for below market value and avoid/minimize taxes?

Hi gurus!

SUMMARY:

My parents want to transfer their interest in our co-owned property to me, receiving back only their initial investment. The property value has increased by $400k. How might we do this and avoid/minimize the tax consequences?

DETAILS:

My parents and I purchased a rental in California in 2000 as tenants-in-common.
The paid 75% ($75k) of the down payment and closing costs; I paid 25% ($25k).
They own 75% and I own 25%.
We were all on title and on the loan.
In 2014, I refinanced them off the loan (they remain on title).
We are all residents of California.
The purchase price was $500k.
The current value is $900k.
We signed, but did not record, an "Equity Share Co-Ownership Agreement", specifying our mutual obligations.
From the beginning, I have managed the property and retained 100% of the rental income and paid all of the expenses.
We have each filed Schedule E and depreciated our respective ownership interests.

GOAL:

Now, we would like to transfer ownership solely to me and return their initial investment ($75k) to them.

The issue of the county transfer tax is secondary (my present focus is on federal and state taxes) but I welcome any comments on that, too.

What is the best way to accomplish this?

Thank you for your advice!


Last edited by IoweHOWMuch? : 03-16-2015 at 03:31 AM.


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Old 03-16-2015, 12:06 PM
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Join Date: Oct 2010
Posts: 5,231
Quote:
Originally Posted by IoweHOWMuch? View Post
Hi gurus!

SUMMARY:

My parents want to transfer their interest in our co-owned property to me, receiving back only their initial investment. The property value has increased by $400k. How might we do this and avoid/minimize the tax consequences?

DETAILS:

My parents and I purchased a rental in California in 2000 as tenants-in-common.
The paid 75% ($75k) of the down payment and closing costs; I paid 25% ($25k).
They own 75% and I own 25%.
We were all on title and on the loan.
In 2014, I refinanced them off the loan (they remain on title).
We are all residents of California.
The purchase price was $500k.
The current value is $900k.
We signed, but did not record, an "Equity Share Co-Ownership Agreement", specifying our mutual obligations.
From the beginning, I have managed the property and retained 100% of the rental income and paid all of the expenses.
We have each filed Schedule E and depreciated our respective ownership interests.

GOAL:

Now, we would like to transfer ownership solely to me and return their initial investment ($75k) to them.

The issue of the county transfer tax is secondary (my present focus is on federal and state taxes) but I welcome any comments on that, too.

What is the best way to accomplish this?

Thank you for your advice!
UNDER TIC, ownership can be held in equal shares or unequal shares; there is no legal requirement that any expense be allocated according to ownership percentage. I guess it depends; a transfer can be a sale or purchase, but it also can be a gift. Transfers that constitute a change in ownership may occur by any means, including, but not limited to, transfers that are voluntary; transfers by grant, gift, trust, contract of sale, addition or deletion of an owner, or property settlement. Payment or consideration for the property is not required. Since buying out parents' interest for below market value is not considered an arm's length transaction(a transaction in which the buyers and sellers of a product act independently and have no relationship to each other
), the transfer for this small amount could be subjected to gift tax rules;I mean the IRS would merely consider this a bad deal. However, when dealing with an immediate family member, the transaction loses any possibility of being considered an arm's length transaction and may be subjected to capital gains tax or to gift taxes and perhaps both. In effect, it is much the same as money from little or no risk for the child, meaning it could be looked upon as a windfall.If it is treated as a gift, then your father needs to file form 709 aslongas the discount amount exceeds $14K for 2015,however, UNLESS his cumulative gift amount is $5.43 Million for 2015, he does not need to pay any gift tax.The best way is to talk to an IRS EA or a CPA in your local area for more info in detail.



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Old 03-16-2015, 12:30 PM
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Join Date: Mar 2015
Posts: 2
Hi Wnhough,

Thank you for your information. I understand what you are saying. You used the word "windfall" -- are you referring to a different rule versus "gift" or are you just saying that such a large difference in the transfer price versus the market value (the windfall to me) would be considered a gift?



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Old 03-16-2015, 07:55 PM
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Join Date: Oct 2010
Posts: 5,231
Quote:
Originally Posted by IoweHOWMuch? View Post
Hi Wnhough,

Thank you for your information. I understand what you are saying. You used the word "windfall" -- are you referring to a different rule versus "gift" or are you just saying that such a large difference in the transfer price versus the market value (the windfall to me) would be considered a gift?
as i said it depends;it can be either regular sale/purchase OR a gift,depending on the transaction situation between your parent and you.



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