Renting house from parents & hoping to sell and share profits

[Trent Wright]

Hi everyone - I'll preface by saying im a total newbie when it comes to real estate, but I'm extremely handy which is why I was able to work out this arrangement with my parents in the first place. I have some questions regarding my unique situation and I knew BP was the place to go for some help.

Long story short. I found a property in Kansas City, MO a few years ago in a great neighborhood but it was a foreclosure and needed a ton of work. I didnt have the cash to buy the place - so my parents who are real estate investors bought it.

The place needed a ton of work (new plumbing, new electrical, collapsed main sewer line, foundation issues, tons of cosmetic work, etc). So the arrangement was that I do a majority of the rehab over time (parents covering almost all rehab & material cost), in return I get a good deal on rent to live there (approx 30% below market rent rate).

Now after living in the place for about 3 years and fixing it up, I'm looking to move out and buy my own place. I'm hoping to work out some arrangement with my parents so that I could get a cut of the profits when they sell the place to help put towards a down payment on my own house.

Hoping the BP community could help me come up a with a way to structure a deal that could work out well for my parents and I. Specifically - how do I structure the deal to be appealing for my parents, while reducing tax liability for both parties?

Details of the house:
Kansas City, MO
Purchase price + Rehab cost so far: $185K ($115k purchase price in Cash + $70k rehab).
Approximately another $25K needed for additional rehab before putting house on the market. I would complete this before moving out.
Potential ARV: $360,000

House is in parents name - not an LLC, etc.
Parent will use profits to buy additional rental properties, and I would use my cut for down payment on my own home. So with a 1031 exchange that would avoid capital gains tax, right?

How would they be able to share 30-40% of profit with me while avoiding gift tax? Is there some other creative way we could structure this deal? Appreciate any help.