How do we utilize gift money / inheritance in REI

[Rodney Smith]

Hello everyone! So I have a question (really more of an accounting question) but since many of you are shockingly savvy and have been involved in many deals i'm hoping to glean some wisdom from people who have maybe been down this road already or been involved in a deal of this nature. So heres what we are trying to achieve!

My siblings and I are purchasing a portfolio of properties and are using some inheritance money from our parents (still living) to help fund the transaction. Naturally my parents dont want any connection of any sort to the properties, but rather are helping fund this to jumpstart the family biz. My question is - how can we structure the payment portion from our parents in a way that does not bring on tax liability but also does not require our parents to stick their necks out by being "on the title , LLC, etc." and increasing their exposure?

We have considered buying the properties under a separate LLC entity and drafting a private loan contract between the LLC and parents (which has no legal requirement to be recorded) but i'm sure it wont be that simple. We've also considered doing an interest only loan with parents and having debt forgiven / re-nogotiated / re-fied etc each year to lower our principal balance.

Your thoughts?

Thanks in advance!

[Dion DePaoli]

It is not clear how much money each kid is to get.  Your parents can gift each kid funds personally.  There exemptions up to $14,000 per kid.  ('Might' be able to do each parent to each kid - ask your accountant taking total to $28k)  I will come back to that in a moment.

Each kid would then take the dollars and contribute them into the LLC. From what you describe in general there is no need for multiple LLC's or too much other complexity.

Do not make fake loans or loans that mean nothing.  That is loan fraud.  Do not make a loan and forgive the obligation.  That would be an income event to the LLC and loan fraud.

If the amounts to be gifted exceed the $14k per kid then you can simply do it again next year (2016) or your parents will have to pay taxes on the gift.  As I mentioned above I thought the IRS code allowed for each parent to give but I am not 100% certain on that provision.  If both can gift tax exempt then within the next two months you could have up to $56k.  If it is only one gift per kid jointly between the parents then 2015 you can do $14k and 2016 you can do $14k.