Helping a family member fix/sell a house and preparing for taxes

[Dave Zarcone]

Hello all,

I just joined Bigger Pockets with an interest in expanding my knowledge and preparing for building a real estate portfolio. I have yet to do a deal but recently a family crisis has put me right into the middle of a real estate project. I will detail out the scenario below with questions and would love if you could help me navigate through this scenario.

Recently, my distant aunt fell into very hard times. Instead of explaining the entire messy scenario I will simply explain the outcome. She had a nice home in Lake Elsinore, CA that was being taken care of by her daughter... but in reality her daughter destroyed the house and left it abandoned. I am now helping my aunt fix up the house and sell it. 

She bought the house in 2012 for $225k. Comparable homes (similar sqft and bed/bath) in the neighborhood are currently selling for around $400k. However, this house needs a lot of work before we can sell it. I am estimating (after a home inspection and contractor inspection) that we are looking at around $50k in renovations. In order to keep this simple, let's just assume these numbers are correct. The house will have a $400k ARV and will require $50k in reno.

Now is where I need your help.  My aunt has no money and is currently incapable of running this project, so my dad will cover the reno costs and I will manage the entire project. Ultimately, after the house sells he will need his $50k returned, I will take a small cut for my time and effort, and my aunt will get the rest. So if the house sells for $400k, my dad get's his $50k back, I get $10k, which leaves my aunt with $340k to get her life back on track. (Again, I'm keeping things simple at this point and not including closing costs and REA fees...)

We are just starting to get our feet wet on this project so we are trying to plan out the best way to attack this scenario, so I will list out my questions and I'd really appreciate some insight... I'd also love to hear if you have any other advice on how you would handle this situation.

What is the best way to handle the finances in order to incur the least amount of taxes? Remember, she will need to pay my father back, and pay me a small chunk

She will pay capital gains taxes on the profit. In this scenario, is the profit = sale price - purchase price - reno costs... even though she did not pay for the reno? Should my father gift her the money to pay for the reno so all receipts are in her name? 

How should she go about paying my father back? 

If she wants to buy a new house and take advantage of the 1031, how does that work with paying capital gains, returning the $50k reno, and paying me? Can she simply use a portion of the sale price for the 1031 and then pay capital gains on the rest so she has the money to pay us?

Will I need to declare the portion I make as income? Or can she simply 'gift' me the money? Of course I want to do this legally and correctly, but if I can do that without paying taxes on it then I absolutely would. 

Wow... I have covered a lot and left a lot of questions on the table. What a messy discussion I have started..! Again, please understand that I am new to the world of real estate. At this point, I am just trying to understand the basics of how this scenario can play out and come up with a plan. Then I will do all the research to make sure we execute that plan efficiently. I really appreciate any and all help. Thank you so much. 

Dave