Advice: Parents want out of rental. Cash out killing our taxes.

[Michelle R.]

Help,

We have owned a rental property with my parents for 10 years and they decided they wanted out. We originally agreed to pay them $25,000 a year over four years, BUT they played hardball when the market went up in California and we agreed to give them $60,000 in 2021 and again this year.

We had no choice but to take this money out of our 401(k) which had huge tax consequences for our income last year.  Any tips or advice for lessening tax impact on our 2021 taxes? Or do we just suffer the taxes now and somehow add this $120k to the cost basis when we sell the house to lower our capital gains taxes?

It’s family, but having to take out $60k over 2 yrs vs $25k over 4 yrs puts us into a whole different tax bracket. Doesn’t seem right that they get $120k tax free.