Transferring rental properties from Parents to my sister and I

[Jeremy Tran]

Hey Everyone!

My parents are in their mid-70s and are looking to hand over their properties to my sister and I. They have been managing the properties by themselves during their retirement, but now they're looking hand it off and just collect money to cover their living expenses. 

They have 10 properties. 6 of which are now paid off and the other 4 have standard 30 yr mortgages on them. 1 property is my parents' primary residence. 5 properties have my parents' and my name on the deed and the other 5 have my parents' and sister's name on the deed. None of them are in an LLC.

I've been talking to a number of RE attorneys, my tax accountant, and a number of RE connections and here's what I've gathered may be the best option for us.  

As far as legal structure, we are looking creating 5 legal entities. 4 entities would have 3 homes each and 1 umbrella entity that they fall under. My sister and I would have 50/50 stake in everything. 

So here's what I'm thinking...

Do an owner carry sale on all the properties at the appraised value (For simplicity, lets assume $200k each) on a 30 year term at the applicable Fed rate (~2%). 

If I understand correctly, my parents can gift us $15k each with no tax penalty. So that would be $60k total which would act as a down. 

So... $2M total - $60k down @ 2% for 30yrs would be around a $7k/month payment from the LLC to my parents. I think this way is best to raise the cost basis in the event we decide to sell any properties.

As far as taxes go. For my sister and I, I'm guessing we will be subject to regular income tax minus the interest, operating costs, and depreciation. 

And for my Parents, since their income is technically $0, I think the payments we make would be considered capital gains. Therefore, I think they would pay 0% for up to $80k + the standard deduction. If we're paying $7k/month or $84k annually, their tax liability should be $0 right?

Am I on the right track for this or am I overcomplicating things? Is there another way I should approach this?

Thanks in advance!