Legal/Tax Suggestions for Seller wanting to preserve step-up tax shield benefit

[Dan Becker]

Hi All,

I am looking for deal structure suggestions on a unique situation that involves a home held in trust.

I have a seller who owns and rents out an SFR that has an FMV of $~2M. He and his wife hold it in a revocable trust with plans for the asset to be distributed to his adult children. The property is in California, so the children will get the benefits of a locked-in property tax assessment value that is at least half of similar properties ($27k), and when the children do sell, they will get a step-up in cost basis for ~$1.6M on the eventual sale. Assuming a 30% tax on the gain, I am ballparking that benefit to be a $480k tax shield for the children.

However, the owners would prefer to sell now.  Primarily because home prices in the area are expected to flatline / deflate/ correct,  but also because the property was built in the 50s and more serious deferred repairs and maintenance are starting to compound.  It is becoming a lot for the 80-year-old owners who are expecting greater costs in time and dollar (self managed).

Is there any creative deal structure that can be used so that I can buy and occupy the home including the assumed improvements, repairs and maintenance, while allowing the seller to preserve the step-up tax shield for their descendants?  The other constraint, the seller is not interested in a 1031 exchange if it means owning/managing another property.

So far, the only concept I can think of is something like a contingent title transfer upon closing.   I'm not sure if there is such a deal structure or even the risks involved if engineered,  but the idea would be that the title doesn't really transfer / and a final balloon payment isn't made until after the property actually transfers to the children.   

Is this a feasible concept, are there other concepts to consider?

All thoughts welcome, and thank you!

--DB