Renting and eventual sale to family at below market rate

[Lawrence Kaplan]

I am somewhat new to real estate rentals, but am pretty knowledgeable about taxes. Here is my situation, and I wonder if my overall strategy is sound.

I have 2 goals in posting this - first to inquire if I am missing anything or otherwise being unwise or risky in my strategy, and secondly, to document a situation, not all that uncommon, which may help others in similar situations.

1.) My wife and I bought a condo a few years ago for our daughter to live in. The condo is titled to our family trust, and there is no mortgage, We have been renting it to her for an attractive rent - clearly below market value.

2.) We have been declaring the rent as income on our taxes, and taking a deduction for the real estate taxes on Schedule A. No other expenses or deductions are taken, because we are renting below market.

3.) Due to the new tax laws, and our personal situation, we will no longer be able to deduct real estate taxes if things remain status quo.

4.) In October, our daughter's partner is moving in with her, and we are raising the rent to market value. We will convert the condo to rental property at the time for tax purposes and begin to take all advantages offered to us - depreciation, expense deductions, etc.

5.) In the future, in perhaps 3-4 years, our goal is to sell the condo to her at (well) below market value.

6.) We will at that time claim gift taxes for the difference between market and the actual sale values, minus the annual gift tax exclusion. We will take the available credit against the unified federal gift and estate tax exclusion, and expect to pay no actual tax. (Yes, our estate tax exclusion in the future will be reduced by this amount.)

7.) Our sale is expected to be a loss, and we expect no capital gain or tax due to depreciation recapture. I understand that the capital loss cannot be claimed.

The entire intent to to practice parental largess without being subjected to additional taxes other than what is noted.

Any comments or advice is much appreciated,

Lawrence Kaplan

Marlborough, MA