All Forum Posts by: Alexandra E Aponte

@Alexandra E Aponte gifting property is usually a bad idea due to missing out of the stepped up basis you will be granted at the time of inheritance. If you were to inherit the property, your basis in the property will likely be equal to the fair market value of the property at the time of inheritance. This means that you can turn around and sell it without paying any capital gain or depreciation recapture taxes.

When a property is gifted, you maintain the basis of the giftor, meaning if you turn around and sell the property, you will pay capital gain and depreciation recapture taxes as appropriate. 

Another issue with gifting property is that any amount over $14,000 (the annual exclusion) will reduce the parent's lifetime exclusion amount currently at $5.43MM and indexed for inflation. So if the property is worth $140k and is fully gifted to you, your father will reduce his lifetime exclusion by $126k. This is not currently taxable, but if your father has a large estate, he may regret this decision later on. 

If you are stuck on the gift idea, my recommendation would be to establish an LLC or trust and have your father gift interest in the entity/trust in the amount of $14k per year indexed for inflation.

Another way to go about this will be to have him sell you the property on a seller financed basis. You would pay enough to cover taxes and depreciation recapture, and he will hold the note. Best thing about this is that you can pay him a very nominal interest rate and you get that stepped up basis I mentioned earlier. 

I'm not an attorney, and frankly do not know the answer to your question.  But I have some thoughts:

First, does your father own the property free and clear?  And I'll tread lightly around the second question, but is your father in good health?

With that said, I doubt a trust is the right tool here.  Trusts are great for passing assets to heirs at the passing of the parent, but I don't know that they can be used to get around the IRS gifting limits.  In this case, the property were put in a trust, I doubt you could get financing to get money out of the property.

My wife and I are in the process of closing on our third property, all of which have been bought as owner occupied single family homes.  We lived in the first for 2 years, and will be leaving the second after just under 1 year.  

In our experience there was no trouble from the banks holding the mortgages on houses 1 and 2 when we decided to move out and put a tenant in. However, as Dawn suggests, they did both have a issue with trying to pass the properties into an LLC because of the DOS clause. The biggest obstacle was getting a bank that would accept a signed lease as part of our debt to income ratio so that we could qualify for the next house. Wells Fargo is actually doing this for us this time around.

For us we were willing to take on the extra burden of moving multiple times in order to start a rental portfolio into which we put down 5% or less (0% for the first house via USDA loan).  Large down payments make your cash flow look better but they don't actually make you any more money (other than the reduced interest on the smaller loan amount).  Provided the property still cash flowed, I'm sure just about everyone would buy with 100% financing if they could find it. 

Direct responses to OP's questions:

1) Transfer of a property that has a mortgage into a new (no liquid assests) LLC runs a legitimate risk of triggering the due-on-sale clause with no way of responding short of fire selling the property. If you have a strong written lease and only the one rental property, there's relatively little benefit to the LLC

2) Jumping 150k+ up in price point only to then count on additional appreciation seems a bit too optimistic.  I've never counted on appreciation (or, to be fair, depreciation) in any of my real-estate scheming, most primarily because I plan on a long term buy and hold strategy.  Aside from avoiding full scale D & F neighborhoods, cash flow has been my primary diagnostic measure.

3. I certainly understand the itch to put your liquid assets to work.  My only caution is that you can only spend the money once, so don't go buying the first opportunity that comes up just because you're motivated. 

Thanks so much for taking the time to respond Kevin and Eric. The loan we got was not an FHA so there's no PMI. If we rent out at 2K we would be cash flowing around 200 per month depending on maintenance expenses. Not a ton, I know, but we bought in an area where there's rapid growth and have seen houses sell around us for around 260+ just within 2 months we've been here. I know they say appreciation is speculation, but either way rents would cover our mortgage. As far as having 25% down, that's tough in this Austin market, but maybe possible in SA.