Best Way to Gift Property to Family to Avoid Taxes

[Nghi Le]

My brother-in-law has a primary residence (with no mortgage) that he may want to sell to us in the future (and we want to rent it out or do AirBnB).  However, we want to minimize taxes for him and for us.  Currently his basis in the house is $50k, and the house is worth between $300k and $450k (if it's remodeled).  If he gifts the house to us (and then we'd hold a Note on the side or something), then our basis would be low too, which would hurt us if we sold it later on.  At the same time, we don't necessarily want to buy it at a high price, and we don't want to put a down payment.

After some research, I think I might have found a way, but wanted to confirm on BP with CPAs that specialize in Real Estate.  There is an annual gift tax exclusion of $14k.  We were thinking of taking advantage of this by having him seller finance and sell us the house at market rate (or a little higher).  Then each year, he would forgive up to $56k of debt as the gift.  That way we can essentially buy the house at a discount while keeping a high basis.  We might potentially have him get a loan on the house (to finance the transaction and so he can get some cash out) and then take the property subject to (or do a wrap-around seller finance?).

Couple of questions:

1.  Does the annual gift exclusion work in this way, by forgiving the balance on the Note?

2.  The property is owned by him, and he recently got married.  Since it's only owned by him, can we still include his wife's exemption in order to reach the full $56k ($14k each from him and his wife to me and my wife)?

[Linda Weygant]

Originally posted by @Lance Lvovsky:

Yes, the annual gift tax exemption applies on a per donee basis - family of non family is a non issue. You could give 100 people 14k each every year and not worry about using your lifetime exemption. The fact that you hear different opinions from your sources means you are asking the wrong people for advice. Get with a knowledgeable CPA who knows gift taxes.

Also, the principal portion of forgiven debt is NOT taxable income to the donor. Only the interest portion. 

 I somewhat disagree.  Here's how I've seen these structured.

Debt is for $100,000 @ 5%.

End of year 1, $5000 of interest is imputed to the loan.  Lender declares $5000 of interest income, borrower may be able to deduct $5000 of mortgage interest.

Balance of loan is $105,000.

Gift $14,000 as a reduction of the loan (NOT forgiveness of debt).  Hypothetically, the lender could write a check to the borrower as a $14,000 gift.  The borrower would then write a check back for $14,000 as a loan payment.  This would accomplish the same thing.  

Loan balance is now $91,000

There is no portion of this that is debt forgiveness income.

I think the key here is that the lender has to declare the interest income.