Hi Jeanelle,
First and Foremost I'd advice to consult your CPA and attorney on the matter. The following is opinion and my experiences. Anyone is free to challenge or change my mind as, like many here, I'm here to learn first and share what I know second:
Your husband's parents could sell the commercial property at that discounted rate to you and your husband on an installment plan (Seller Carry). Your in-laws will benefit from receiving a designated amount (a CPA will be able to calculate this amount for you) to reduce, or potentially mitigate the total tax implication based on their marginal tax rate brackets. This poses drawbacks as well. Most notably, you will now have a tax basis at the discounted purchase price.
Example here:
If you buy the building for $700k even though the value is $1m, you will now have a tax basis of $700k in the building. In this example will will use very basic numbers for the sake of clarity, but if 50% of the $700k was building and the other 50% was land, then you would only be entitled to depreciate a total amount of $350k at it's respective depreciation rate (building, improvements, Fixtures, etc.)
an installment plan at Fair Market Value ($1m) on favorable terms may be an option. Similar to the the example above, a Seller Carry loan can allow you to own the property at its present market value and pay back the full amount over a desired timespan at fair interest rate. This can extend pass their lifetime, and if structured correctly, could allow for a steeper discount than that of the $700k potential sale price (CPA will guide you further).
Gifting bites into their lifetime gifting limit, but at $1m value, they're presumably far below that. The reality, though, is that if they're receiving compensation for their gift, then it really isn't a gift to begin with. Gifting also has implications in terms of your tax basis as well. In fact, considerably worse than the example above, considering the Donor (Gift Giver)'s cost( adjusted tax) basis, carries over to the recipient (You and your husband). This means if they bought the property for $100k, that is YOUR new tax basis in the property. See example above for further.
Another approach, a bit more creative, would be to have your in-laws place the property into a trust with you and your husband as the beneficiaries. With this, your in-laws will own the property until they're both deceased, then the trust will kick in and you and your husband will be the beneficiaries of the property and enjoy it at its brand new stepped up basis (Fair Market Value) at time of death and own it in its entirety.
A way to make this work, and that will allow for your in-laws to make additional income (potential purchase price) is to build, as permitting will allow, the additional units you mentioned, therefore increasing their opportunity for more cashflow. Instead of paying your parents directly, you could create an entity that manages said properties. The difference in cashflow could be their payments on "purchase price". If you and your husband are managing the property on your in-laws behalf, you can have them pay Management Fees to your entity to either cover any loans you may have taken for construction. While you may not get a property today, at date the trust kicks in, you'll have a considerably greater tax basis than the $1m now, and if you've been managing the property throughout, then only thing that will change is the name of the owner and who gets to keep the money at the end of the day. This is a significantly longer play, but will give you the exposure to running and operating a commercial space. Say your in-laws live for 15 years, and 10 of those 15 you've established and built a successful operation, ownership of this will then give you the opportunity to have the confidence to cash out refi and invest in another space and rinse, repeat.
I hope this was helpful. Best of luck on your real estate journey!
Marco
