Buying House from Parent With Unique Circumstances

[Kristi Monighetti]

In 2018 I separated from my husband and needed to buy a house. Due to my pending divorce my dad helped with my house, I put the money down to buy it and he obtained the loan and also left me off title (long story there). Fast forward 5 years, it's time for me to take ownership of said house. I have read so many different things and would love to hear what the professionals have to say about taking possession. My dad and I have a written agreement that he would sell the house to me for what "we" bought it for 5 years ago, obviously the value has increased as well as rates. Can he just add me to title, should I do a sub too? What else should I be looking into?

Sidenote, my dad is open to what works best but has also cautioned me there will be a gift tax involved and probably a step-up in basis. 

[Kristi Monighetti]

Quote from @Carlos Ptriawan:

Quote from @Dan H.:

@Bill Exeter

This may be more a question for tax expert more than 1031 exchange intermediary, but if the property is sold below fair market value, there is a gift.  Assuming her dad is not very wealthy, the gift can go against the estate limit, so there should be no gift tax (assuming your dad’s estate is not substantial enough to cross over the estate limit).  

However, I would think cap gains tax would be triggered.  Otherwise selling at artificially low acquisition price could delay the cap gain tax consequences.  Typically the government want their taxes.   Do you know if cap gains taxes (without 1031) will be collected for a below market selling?

I do know selling at below fair market value will not preserve the prop 13 property tax basis in CA.  A property tax representative will request the buyer provide the appraisal.  If there was no appraisal or the buyer does not provide the appraisal, they will assign their own new value stating it is based on comps but not provide you the details of how they got the value.  There is an appeal process.  To summarize, the exchange from father to child in this case will trigger a new property tax basis if they realize a transfer occurred.  Deeds change regularly without an actual transfer.  Upon death, there is death certificate, etc triggering that a transfer occurs.  I am unsure that this transfer would be recognized as a transfer. 

OP needs to consult with a tax expert that includes knowledge of the CA property tax subtleties.

In general it is easier to get advice before doing something like this and doing it optimally from the start than try to determine optimal way at this time.  However, I will mention in 2021 the CA property tax rules changed as related to properties from parent to child.  So even if you had consulted a tax expert prior, the rules have changed since you first acquired this property (so that advice may not have been optimal under current rules).  

 One really need to sacrifice something to gain bigger in something else , I really would like to hear Dave Foster opinion as well. If someone could generously giving like three or four scenario that would be wonderful. 

Yhis wojld be very interesting case study as well as I see lot of this happened in CA market.

 I have reached out to a CA real estate attorney and will keep updating as I learn more.

I believe it will come down to utilizing a method that will be a leaser of the evils, ie not paying capitals gains if we maneuver correctly but probably having a new property tax imposed.