How to Transfer Income to Kids
We bought a house earlier this year in Milwaukee with owner financing and I have a question on how I can involve my kids in this transaction. I do have an accountant but being in the middle of tax season I hame hoping to get a few ideas to bounce off hime before I pull him into the discussion.
The complicating factor for this house is that we bought it with owner financing and I don't want to freak out the former owner with a title change so I want to keep the house in my LLC's name for the next few years until the balloon is due on this loan. I already have created the LLC for my sons, I have a small stake in that LLC.
I have thought of two ways I can approach this but would be interested on thoughts from the group on benefits / drawbacks of these approaches.
Approach 1: Create a master lease / NNN Lease to my sons entity along with a Option to purchase. This would make the boys responsible for all taxes, insurance, and maintenance. I see the issues with this as keeping quickbooks straight so that the taxes are clear at the end of the year. Our PM won't set up an account with the boys entity due to the property still being in our LLC not theirs so rents would have to flow into our entity, net of expenses, and then transfer through to the boys. My LLC would have to be cash neutral with the boys showing the profit. The lease option would be a sliding purchase price based on the amount of time they have held the lease.
- Anyone have thoughts how depreciation would work in this scenario? I would expect the depreciation to stay in my entity until the purchase option is triggered then I would have recapture. Any thoughts on how the Purchase option fee would work? Would that become part of the purchase price for them when we do the transfer and part of the sale proceeds for us when we sell or is that all accounted for at the time of the sale? They have a few thousand to put towards the deal.
Approach 2: Sell to the boys on a land contract and hold off on recording it. I would likely have the same issue with the PM on this but there would be a purchase agreement with a date and a payment schedule so I would eliminate any complexity around how to handle the purchase option fee.
I am open to other ideas that don't change title and thus trigger the due on sale clause but would help document the cashflow in they boys entity.
