Best Way to Get Parents' Rental from Them

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Best Way to Get Parents' Rental from Them

Lauren Keen Aumond
Investor · Tarpon Springs, FL · Member since 2018 · 49 posts · 11 votes

My parents own a rental property in Kenneth City (near St. Pete, FL) free and clear. My father is OVER the landlording game. As a matter of fact, my mom owned this property when they married almost 30 years ago so I'm not sure he was ever into it to begin with. They won't sell the property because of the taxes - he's still working and they're in a high tax bracket. The plan is to sell the property at some point to help fund their retirement. Since I'm developing a passion for real estate, I would like to find a way to "get" this property from them. I say "get" because I'm not sure if buying it from them makes sense or not. What's the best way for me to end up owning this home (other than trying to convince them to die owning it) with the least amount of tax burden on both sides?

Note that my parents are willing to partner with me on real estate deals. They see the value, they just don't want to be active. This is why I'm thinking we should work with what they already own, then work on new deals later.

Thanks!

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Frank Gucciardo
Highland, NY · Member since 2013 · 169 posts · 130 votes
8y

After owning it for 30 years, they have run out of depreciation and it likely makes better tax sense to sell the property.  I'm by no means a tax professional so I would check with their accountant.

One thought on transfer, if the property makes money, is to do owner finance.  You pay them an agreed upon down payment amount (or no money down) and then a monthly mortgage payment based on agreed upon terms (interest rate and term).

Best of luck!

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  • Frank Gucciardo
    Highland, NY · Member since 2013 · 169 posts · 130 votes
    8y

    After owning it for 30 years, they have run out of depreciation and it likely makes better tax sense to sell the property.  I'm by no means a tax professional so I would check with their accountant.

    One thought on transfer, if the property makes money, is to do owner finance.  You pay them an agreed upon down payment amount (or no money down) and then a monthly mortgage payment based on agreed upon terms (interest rate and term).

    Best of luck!

    1Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    If that is the case the best way for them to avoid involvement is to hire a property manager (which may not be the best for you) or higher you to manage the property.  If they hire you I strongly suggest a written conflict to help resolve any potential conflicts down the line.  The only fair way that I see you being able to "get" this property would be a private sale to you, which would save on Realtor fees but not taxes.  Now part of your property management agreement if you were to manage the property could theoretically be equity, but it would be such a small amount each month that it might not be worth the effort.

    1Reply
  • Mark Hughes
    Rental Property Investor · Aurora, CO · Member since 2018 · 288 posts · 117 votes
    8y
    Interesting situation. I’m curious to hear more responses as I might be looking to do this down the line to my kids
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  • Alan Rohrer
    New to Real Estate · Indianapolis, IN · Member since 2017 · 102 posts · 74 votes
    8y

    @Lauren Keen Aumond

    If they are not opposed to staying in the real estate game, and they have interest in partnering with you, you definitely have some options.

    The first thought may be to do a 1031 exchange. However, they can't sell a property they own 100% and 1031 into a partnership they don't fully own that purchases a property. 

    One option if they want to go in on a property with you would be to 1031 into a Tenant In Common (TIC) arrangement with you. This is where 2 parties own an undivided interest in a property. Translation: "you would both own a certain percentage of the WHOLE property. You couldn't split it up where you owned the house, and your parents owned the land... you own an agreed upon percentage of everything."

    @Dave Foster may be able to elaborate on this, as I admit I'm a bit rusty on this strategy.

    This may be a good way to partner with you and avoid taxes. I believe a TIC can then be passed down to heirs (you) when they pass away.

    An installment sale, seller financing, and many other sale methods will likely result in paying taxes on their end (it would just be spread out over a number of years).

    And having them sell it to you at a low purchase price (to avoid taxes on their end) would decrease the amount of depreciation you would be able to take... which would increase taxes on your end.

    Also, taxes are not necessarily something to always avoid at all costs. There may be situations where incurring taxes as a result of moving their money into an asset class that better fits their goals isn't a bad decision. You just need to run the numbers.

    Because of this, I'd recommend chatting with a RE CPA that has a full picture of you and your parent's financial situation.

    Hope this helps!

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    8y

    So it's tacky and thoughtless, but the common strategy for most people is "1031 til you drop".  Meaning, you 1031 your properties until you die.  Then you pass them on to your heirs who inherit them at the value of the day you pass (or an alternate valuation date - beyond the scope of this discussion).

    So....  From a tax standpoint, there is no better strategy for your parents or you.  But real estate is (gasp!) so much more than just taxes....

    There are a few things they and you could do if they want out sooner and you want in.

    1 - Pay you to manage it for them.  This gives you the experience you'll need going forward and gets your dad out of the day to day headaches.  You can still hit him up for final decisions and advice, but you'll be the one dealing with tenants, managing repairs and maintenance, etc.  Treat him as a combination of mentor and boss and you both might be really happy with this.

    2 - Gift portions each year.  This will take some consultation with both a lawyer and a CPA, but the basics of this are that each year, you have the property appraised.  Your parents then gift you the maximum gift tax exclusion each year as a percentage of the property.  For 2018, that's $15,000.  So if they have a property worth $150,000, they gift $15,000 to you tax free and you now own 10% of the property.  This will be subject to such things as life time exclusion limits and some other tax issues, so make sure you consult professionals to set this up.  

    The problem with this is that at the point that you have 100% ownership, you essentially have your parents' basis which is likely $0.  So no depreciation deductions for you and you'll have the capital gains issue to deal with if/when you choose to sell.

    This scenario also gets VERY tricky when you have siblings or other people who are hoping to inherit your parent's assets, so tread lightly.  These kinds of things have been known to break families apart, so overall, figuring out how to get this property may not be the best plan if you've got contentious family relationships.

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  • Lauren Keen Aumond
    OP
    Investor · Tarpon Springs, FL · Member since 2018 · 49 posts · 11 votes
    8y

    Thank you all for your input. Definitely understand that taxes are not the only concern here, but it seems to be the sticking point for my parents and their reluctance.

    I've mentioned both 1031 exchanges and how holding until they pass would help me and my siblings out when they "drop." They're not thrilled with either option, which I understand. They want to see some of this money.

    Perhaps me managing it for them is the best way.

    I'll also look into the TIC.

    Anyone know if NNN makes sense here?

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Lauren Keen Aumond, @Alan Rohrer is spot on in his assessment of a TIC possibility with your parents. But I'm not real clear on your goals. Do you just want to own the house or are you looking to create a scenario for you to sell the house and use it to further your investment goals?

    You could create a management agreement with them that allows you to manage and transition the portfolio how you see fit.  

    Alan didn't quite get there but it would be possible for them to sell the property with a 1031 and purchase a replacement property with you on title as well. As long as they purchase at least as much as they sell they will fulfill the 1031 requirements. If the property they are selling is $200K and you find a good $400K building for them to purchase you could take title to 50% as a TIC with them and they would own the other 50% and defer all tax from the sale.

    I also totally agree with @Linda Weygant, if you've got siblings, your parents want retirement income and this is an estate planning thing fraught with potential drama then maybe a 1031 into a passive TIC (yes a NNN would be the same thing depending on the numbers you're looking at) where they simply generate monthly income with no expenses would be a good move. It doesn't scratch your itch to become a real estate mogul. But it also doesn't open up a potential can of worms.

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  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y

    @Lauren Keen Aumond As others kind of mentioned, maybe try having them hire you to manage the property at first. After a few months of that, reevaluate and see what makes sense for everyone at that time.

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  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    8y

    cyanide

    no legal advice given

    0Reply
  • Lauren Keen Aumond
    OP
    Investor · Tarpon Springs, FL · Member since 2018 · 49 posts · 11 votes
    8y

    Thanks, all. I don't mind actually buying it from my parents so as not to slight my siblings. I'm truly not trying to pull one over on them. I want another rental. My parents have one they don't want. I was trying to figure out a way to make something happen with as little impact as possible. Looks like there's no good way to do that.

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  • Frank Gucciardo
    Highland, NY · Member since 2013 · 169 posts · 130 votes
    8y

    Lauren,  Is it a good investment?  Does it make money?  If so, there's always a way.  If it's a loser then your parents should sell and move on.

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  • Lauren Keen Aumond
    OP
    Investor · Tarpon Springs, FL · Member since 2018 · 49 posts · 11 votes
    8y

    Hi @Frank Gucciardo - it cash flows for the right price, of course.

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