Intra-Family Property Transfer in California

Tax, SDIRAs & Cost Segregation
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Intra-Family Property Transfer in California

Garrett Richardson
Member since 2018 · 10 posts · 0 votes

My mother-in-law owns her home in Northern California. The location is pretty incredible and the area has appreciated 80% in the last 10 years. 

She has never attempted to rent out a property and wants to sell but would open to us taking over all the responsibilities of the rental if we could take full ownership of the home. She is close to retirement, wants to move to out of state with us, and have the peace/zero risk of not having the home in her name anymore. 

We just can’t buy the home from her outright at the moment of course since it’s worth $700K. However, if we did own it and rented it, we could potentially see $1700 in passive income each month and a $250K appreciation over the next 5 years. 

It’d be amazing to keep the property in the family if possible and remove the burden of the home from her if there was a creative way to transfer it into our names without paying for the higher property taxes and pay her what she deserves for the home.

Do you know of any creative solutions or have you heard of a situation like this?

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    6y

    @Garrett Richardson

    With so much appreciation, I would have her fund a Trust with the house, include provisions in the Trust that includes the house in her gross estate so you get a step up in basis at death, you/spouse are beneficiaries, the trust collects rents and remits fiduciary accounting income to you. There is some sophisticated planning that can be done to maximize the step up and accomplish your goals.

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  • John Duston
    Accountant · Santa Barbara, CA · Member since 2016 · 213 posts · 66 votes
    6y
    Originally posted by @Lance Lvovsky:

    @Garrett Richardson

    With so much appreciation, I would have her fund a Trust with the house, include provisions in the Trust that includes the house in her gross estate so you get a step up in basis at death, you/spouse are beneficiaries, the trust collects rents and remits fiduciary accounting income to you. There is some sophisticated planning that can be done to maximize the step up and accomplish your goals.

    There'd also be a step up  in basis with a sale and gain exclusion under 121. Then with owner financing it have the same effect. Whats the real advantage to a trust in this scenario? 

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  • Lance LvovskyPro Member
    Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
    6y

    @John Duston

    Depends on the gain and whether she is married on how much you can shelter with 121. Trust provides more control and flexibility in planning. Trust can also dictate what happens to asset should something happen to owner(s) while avoiding costly probate.

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  • Garrett Richardson
    OP
    Member since 2018 · 10 posts · 0 votes
    6y

    She is not married. To make it a little more tricky, my wife's brother and sister would need to be included in the trust if that was the route we were to go. 

    These are the only two options I can think of at the moment: 

    1. Mother-in-law sells the house. 

    • Pros: She gets fast cash to retire and the peace of mind with lower risk since we wouldn't be trying to maintain/rent the property. That's a fear of hers. 
    • Cons: We lose an incredible opportunity to inherit a property in a prime location (10 min from the ocean), 30 min from silicon valley, incredible appreciation, ready to rent, etc. 

    2. Intra-family transfer: My wife and I take over the property, pay mom for the property value she would make if she sold today AND pay out brother with income from renters over time and watch the home appreciate. 

    • Pros: We keep an incredible opportunity to inherit a property in a prime location (10 min from the ocean), 30 min from silicon valley, incredible appreciation, ready to rent, etc.
    • Cons: We don't see ROI for years, the uncertainty of making this a smooth family transaction, overcoming Mother-in-laws's fears of us taking it over. Mostly worried about how California politics will affect homeownership/renting, ie: Prop 13.

    Thanks for your thoughts. This is such new territory for my wife and me. 

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  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    One thing you should consider also is the property tax situation.  If the property is inherited or gifted WITHIN her family and the correct paperwork is done the property tax should stay set at the now prop 13 level.  I am not sure that is the same if it is bought or sold to the family.  You should ask someone who is qualified in that area.

    Also when considering how to do the title, check if spouses are excluded from the tax increase.  When I transferred property from my mom's estate through by brother's estate, my brother's wife kicked in an increase in taxes for 1/3 of the property value.  But that may be because my brother was deceased.  I did not pursue the County assessor's ruling because the property was for sale and would be out of our ownership fast.  You may want to discuss the tax situation under different scenarios with someone who is qualified.

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  • Garrett Richardson
    OP
    Member since 2018 · 10 posts · 0 votes
    6y

    @Lynnette E. Thank you for your input. Yes, I agree that speaking with someone who is qualified in that area would be best moving forward. Before I do, I just wanted to ask the forums and see what direction they would take a situation like this. 

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