“Gifted” Property in Seattle

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“Gifted” Property in Seattle

Gabriel Mortensen
Member since 2019 · 3 posts · 0 votes

New to real estate investing through unexpected scenario.  Looking for guidance on how I should approach this from my specific situation.  Here is the current situation.  

1. Father in law has a home in Seattle worth about 600K(After Repair Value) with 100K left on the mortgage and wants to gift it to me and his daughter.  

2. The home is vacant now and just completed demoing the inside as it was un livable.  Will be complete with Reno in about 2 months and plan to rent it out to cover current mortgage and save for more investments. 

3. We want to leverage this house to continue investing in real estate (Buy and hold).  

4. I have the capital to pay off the mortgage and transfer in our names through quit claim deed if needed.  

5. Father in law purchased the home for 120K 15 years ago.  

We would love to use this home to invest further in real estate by leveraging the equity in the home.  After doing research on forums and internet I am leaning towards the following path. Quit claim deed of the property, wait 6 months and refinance and have father in law removed.  I understand that we would then inherent the cost basis of 120K and would have to pay taxes on profit if sold.  We are not planning to sell though and instead want to leverage the equity in the home to purchase another rental.  My understanding is in order to do that the property would need to be in my name.  Am I on the correct path?  Is there something I am not thinking about that could cause issues for myself or father in law with taxes or any other areas of concern?

Thanks for the advice,

Gabe




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Sherief Elbassuoni
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
5y

@Gabriel Mortensen, have you also considered HELOC?

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  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Gabriel Mortensen You have the right idea.  As a gift, your basis will be that of your father-in-law's, plus any rehab costs you invest to make it livable.  Your father-in-law will have to file a gift tax return with the IRS, but there should be no tax due for the gift at this point (that will depend upon the estate tax exclusion at the time of his death).  If you were to sell it, then you would owe tax on the gain.  However, since you intend to turn it into a rental, you will not owe any tax on the loan proceeds that you cash out of the property.  You do have the option of moving into the property and living there for two years before you sell it to get a $500k exclusion from tax for the gain.  I like your idea of renting it and using the equity to fund additional purchases.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    Don’t do a QCD, do a regular Warranty deed instead, with title insurance. 

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  • Sherief Elbassuoni
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    5y

    @Gabriel Mortensen, have you also considered HELOC?

    2Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y

    @Gabriel Mortensen wishing you success in your journey!

    0Reply
  • Gabriel Mortensen
    OP
    Member since 2019 · 3 posts · 0 votes
    5y
    Originally posted by @Wayne Brooks:

    Don’t do a QCD, do a regular Warranty deed instead, with title insurance. 

    Thanks for the reply!

     What would be the main reasons to do a warranty deed over QCD?

    Gabe

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  • Gabriel Mortensen
    OP
    Member since 2019 · 3 posts · 0 votes
    5y
    Originally posted by @Bob Norton:

    @Gabriel Mortensen You have the right idea.  As a gift, your basis will be that of your father-in-law's, plus any rehab costs you invest to make it livable.  Your father-in-law will have to file a gift tax return with the IRS, but there should be no tax due for the gift at this point (that will depend upon the estate tax exclusion at the time of his death).  If you were to sell it, then you would owe tax on the gain.  However, since you intend to turn it into a rental, you will not owe any tax on the loan proceeds that you cash out of the property.  You do have the option of moving into the property and living there for two years before you sell it to get a $500k exclusion from tax for the gain.  I like your idea of renting it and using the equity to fund additional purchases.

    Thanks for confirming my plan as sane!  

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Gabriel Mortensen A QCD is typically only used when there is a title/lien issue and people perceive a QCD as cheaper. In some states a QCD itself can cause issues. There is no reason to not use a Warranty Deed. 

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  • Brian Hughes
    Seattle, WA · Member since 2017 · 275 posts · 223 votes
    5y

    If this property is in Seattle city limits, be sure to read and understand all applicable landlord/tenant and tenant protection ordinances. Some are pretty draconian. Especially for SFR see the roommate ordinance: with a single family home you literally have no control over the number of roomates the tenants choose to bring in, all they have to do is claim an extremely overbroad "family" relation to bypass all screening and all occupancy limits. Also be aware of strict screening limits and enforced process for screening (first in time) and that its likely we will lose even more rights around screening - our local city councilperson who has been pushing for (and getting) all these regulations has now decided that FICO score is 'inequitable' (using a different word than they did) and they are pushing to ban that from screening. I believe its already banned seattle or statewide to consider eviction or rent debt if it occurred during pandemic, and you can't screen for criminal background in seattle prior to that. There is also an annual 3 month "winter" eviction ban they are trying to expand to include teachers and any tenant with children during the school year.

    Perhaps,   fix up the property to sell it for owner occupancy,  then reinvest proceeds in a 4-plex (or bigger, depending on how much more debt you want to take on)  someplace outside Seattle proper where the rules are still a bit more sane,  though some of this stuff is starting to leak into statewide rules too.    

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