Cash out Refinance of Rental Property to give to Son

[Kevin D Key]

I am a retired 63-year-old military veteran considering giving a rental property to my only son, a 22-year-old senior in college. The rental home in San Antonio, TX is completely paid for and has a market value of about $356K. Option #1 I'm considering using a Cash-out Refinance to take out 80% of the equity $284K to use to help my retirement. The house will then continue to be a rental property that has a good potential to appreciate in value but will have only a small cash flow. I'll use a "Transfer on Death Deed" to give the house to my son after I die (which would avoid probate.) Option #2 that I'm considering is to sell the house using a Real Estate Agent which will cost approximately 9% total (in agent fees and closing costs) plus additional Capital Gain Taxes (about 15% of the capital gain of $150K which would be $22K). My federal tax bracket is 12%. I would use some of the remaining profit to help my son with a down payment on his 1st house. Which Option do you recommend to help my son get a good start on life after he finishes college?

[Eric Williams]

Quote from @Kevin D Key:

I am a retired 63-year-old military veteran considering giving a rental property to my only son, a 22-year-old senior in college. The rental home in San Antonio, TX is completely paid for and has a market value of about $356K. Option #1 I'm considering using a Cash-out Refinance to take out 80% of the equity $284K to use to help my retirement. The house will then continue to be a rental property that has a good potential to appreciate in value but will have only a small cash flow. I'll use a "Transfer on Death Deed" to give the house to my son after I die (which would avoid probate.) Option #2 that I'm considering is to sell the house using a Real Estate Agent which will cost approximately 9% total (in agent fees and closing costs) plus additional Capital Gain Taxes (about 15% of the capital gain of $150K which would be $22K). My federal tax bracket is 12%. I would use some of the remaining profit to help my son with a down payment on his 1st house. Which Option do you recommend to help my son get a good start on life after he finishes college?

 I like the first option. You should get a step-up in basis via valuation at the date of death.

That would then be passed to your son which would allow for more depreciation, less gain, etc.

Using some of the profit to help with a down payment may create gift tax consequences.

Maybe keep the property, avoid capital gains, get a step-up, and still provide for transfer to the son.

Someone can point out if I'm missing something.