Selling to a family member (or transferring to a trust?)

[Eugene Lubman]

Hi,

I am planning to sell my 3-unit investment property to my parents.  The idea is to provide them with a steady passive income in their retirement.  I will still be managing the property, as well as be an inheritor, so ideally my name should remain on the title.  The property currently has a mortgage on  it, but it should be paid off during the sale as my parents want to own the property free and clear.  Or is it better to transfer the property to a trust owned by my parents where I will be the beneficiary?  Also, I will probably want to do a 1031 exchange as I am planning to buy another investment property to replace this one.   I will almost certainly need an attorney, but I am not even sure where to begin.  What is the most pain free (and, ideally, tax-free) way to accomplish this?

Here are my initial questions:

1. Should I be looking for a tax attorney, a real estate attorney, or a trust/estate attorney?

2. The property is in Connecticut, I live in Massachusetts and my parents are in New York.  What state should the attorney be licensed in?

3. Given that my parents are elderly, what are the pros and cons of selling it to them vs transferring to a trust?

Thank you.

Gene

[Matt Devincenzo]

I guess the first question is why? I know you said why but I mean, what does actually transferring the units accomplish? 

It sounds like they have money, and it sounds like in exchange for that money you're setting them up with an income stream. So why this specific triplex? Why not go buy a new one and not mess with the potential tax issues for you and transfers etc? Another thought you could just keep the tri-plex and gift them the net income each year...it's basically the same thing without any transferring. 

[Eugene Lubman]

The primary reason is that my parents' risk tolerance is much lower than my own (they are retired and are on fixed income). This property was originally a fixer-upper that I finally brought to a point where it is in good condition, has good tenants and good, predictable cash-flow. That is what my parents need. As for me, I intend to use the money from the sale to buy another fixer-upper.

[Dave Foster]

@Eugene Lubman, There's a couple different considerations here.  As far as the attorney goes you may have multiple.  A CT licensed atty will need to be used to close the sale of the property.  Your parents and you could probably use a really good Elder law atty in NY as well to look at how best to structure their ownership and passing to you.

Nothing wrong with selling to a related party and completing a 1031 exchange.  As long as they own it for at least 2 years.  But you can't stay on title.  Or it will be deemed that you did not sell it.  So whether you sell to their trust or to them individually it still has to pass from you in order to do the 1031.

But even more you don't want to be in ownership when they pass so you can get the step up in basis and inherit the property tax free.

[Lien Vuong]

What is the most pain free (and, ideally, tax-free) way to accomplish this?

A 1031 Exchange looks like its the best plan here but you'll have to be diligent to find an exchange property that also meets your future goals and works with the timeline of your home sale.

1. Should I be looking for a tax attorney, a real estate attorney, or a trust/estate attorney?

If your parents have a Revocable Living Trust then the property would be deeded to them, depending on what their decisions are within that Trust, you can be added on at the beneficiary of that property. You will need a RE attorney to transact this sale. No tax attorney is needed, perhaps a CPA to confirm your basis and what your exchange would look like and if there are any potential tax implications with this sale.

2. The property is in Connecticut, I live in Massachusetts and my parents are in New York. What state should the attorney be licensed in?

Where the transaction is taking place which is CT. 

3. Given that my parents are elderly, what are the pros and cons of selling it to them vs transferring to a trust?

Pro is that you're able to recapture your equity there and move into another asset. They also have a 'turn key' annuity asset that they can count on for consistent retirement income. Cons are the liquidity event that your parents will have to do to purchase the home (I assume the funds are in some sort of investment today so there's likely some tax ramifications on cashing those securities). If you want to avoid this you can certainly just 'gift' them the asset and they can deed it into their Trust but I doubt you want to do that without any financial exchange. 

- thing that you'll want to think about is the step us basis and what this sale would mean for you when they pass? CPA/Estate Attorney question 

[Ashish Acharya]

@Eugene Lubman Selling the property to your parents allows them to generate passive income while enabling you to perform a 1031 exchange to defer capital gains taxes. Ensure the sale reflects fair market value to avoid gift tax. Alternatively, transferring the property to a revocable trust provides income for your parents, avoids probate, and keeps you as a beneficiary, but it doesn’t allow for a 1031 exchange and could trigger gift tax.

Focus on aligning the structure with your goals, whether for immediate reinvestment or estate planning, and ensure compliance with Connecticut laws.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.