All Forum Posts by: Jeremy Lee

Hey all,

My parents and I are tenants in common on a property we bought back in 2007. My wife, kids and I currently occupy the property and the ownership split is 25/75. My parents want to gift their portion of ownership to us so that we have full ownership, also so we could sell and get a bigger place if we need. 

There are some caveats we would need to work through; I have two brothers that technically each have a third ownership per the trust (this would work out to 25% ownership for them each based on the current math since I already 'own' [on a private loan agreement with my parents] 25%). It sounds like the way it would work is that I would just opt to take that much less in cash from the estate in my parents' inheritance. All this would be spelled out in a contract of course as far as that arrangement. 

The other concern would be capital gains taxes. However, if this is our primary residence for at least 2 years after they gift/transfer ownership to us, would we be in the clear of owing on capital gains taxes up to $250k per person (or $500k total)? I really doubt this place will appreciate more than $100k assuming we sell within the next 5 years, so the presumption would be that we wouldn't end up owing anything...is that right?

We are just trying to look for ways to minimize/avoid the tax burden (either for my parents or myself). I assume since they would be gifting, there would be no tax burden for them as we would assume it. But the 2 year rule (assuming we stay for that long or longer) would override that. 

I have this conception that it would be difficult owning because of the fact that it has been in the family for so long and there would be certain "expectations" as to how it should be managed, etc (even though they want to have nothing to do with it, apparently) 

If the deciding factor is ROI on current/future net income divided by current market value of the place, it doesn't look too great as current NOI is around $8k. Future NOI with a new tenant could probably look something more like $16k-17k. The place I think would likely sell anywhere from $500k-515k based on comps. He bought it for $25k, so capital gains would be considerable. He estimates netting $350k-$360k back for it after taxes and fees. In either case, the best case scenario in this context would be a cash-on-cash of around 3% - not sure if that's necessarily good for that area. As far as outright buying it from them, there's no way we'd be able to do a cash buy at $500-515k.

JD mentioned buying as if it were at a distressed price - I'm not sure how to determine what that would be. Would we price is based on what he would net from selling it otherwise? So offer to buy at market price *minus* broker and agent fees, and on a private sale and privately backed loan? I'm not sure they'd even want to deal with a loan because it would still be taxable income that they're trying to avoid.

Managing it from afar, us being in Southern California while they're 15 minutes away from it, would be weird I think. I'd be tempted to ask them to check on it, and they wouldn't be happy about that. Yet at the same time, they'd probably feel some inclination to check on things themselves. It might make for a weird dynamic.

As far as the trust, they have a trust setup and their properties are all accounted for in it. Obviously the ideal situation would be just to have it pass to inheritance or to the surviving spouse so that we get the stepped-up basis, but it doesn't sound like they even want to wait to have to get to that point. Overall, this seems like a big burden to my dad that he just doesn't want to deal with anymore. Besides paying the bills and collecting rent, he probably doesn't want to be "on call" for emergencies, repairs and maintenance. This is how one of my brothers feels too. And other brother seems to have very little interest (as well as knowledge or desire to know) in real estate and landlording in general. 

If they were selling it "distressed" we could maybe throw out a number like $450k for the sake of an example if they wanted a 'fast, easy and discounted' sale without dealing with brokers and agents.

Expenses w/o a loan or mortgage are about $6600 a year (this includes property tax, insurance, HOA dues).

Current rents they collect are well below market at $14.4k. If they were properly pricing rents they would have been getting closer to $22k+ by now.

Seems like it might be a better idea for them just to outright sell the thing at this rate (and for us to not be the buyers). 

Was curious if gifting it would make any sense but it kinda sounds like it wouldn't either. Just take the profit, even if cap gains is owed, and eventually reinvest in something else. 

Them camping on it till it goes to inheritance sounds great but it also sounds like they would rather not deal with keeping it to that point.

Hi all

My dad has a 1br/1ba lower unit condo/apartment up in Alameda and is looking to sell it because:

"don't want to deal with increasing HOA Mgmt Fees, additional liability Insurance, Prop taxes NONE of which will be useful for tax deductions as ours cap at $26.5K and NO SALT.

CASH FLOW will be declining and not worth hassle.

Not really managing anything, just one more thing I don't want to deal with and adds to taxable income."

This is more a deadweight it sounds like. 

There were a couple options he presented originally:

1) Gift the property to either one of my brothers or I, or all three of us if we were to get into some sort of LLC/Business/venture. This could create complications down the road as far as splitting it up in relationship to inheritance, etc.

2) Sell the place because he's "tired" of dealing with it and park the money in their trust invested in CA Tax free funds. 

The other option of course would be for me (probably not my brothers as they wouldn't be interested) to buy the place from them on a privately backed loan from them. 

He is *not* looking for something with higher returns - he wants to reduce his taxable income, not increase it. Both he and my mom are retired and are both collecting pensions in addition to other sources of income from a couple other properties they own. This condo just seems to be not worth their time. On the other hand, they've been charging below-market rent for a long time now (also probably due to not wanting to generate so much additional taxable income).

All this said, both the options presented above would incur capital gains taxes (either on is if he gifts it) or on him (if he sells). There's no way around that unless it becomes inherited (stepped-up basis) but I don't think he or my mom want to wait that long and would rather unload it sooner than later. Given the options stated, what do you guys think would be the best route to take? Especially if I've been considering getting into REI? Or is it just not a good idea given high housing costs in that area, etc?

BTW: he bought the place for $25k roughly and it would probably sell for $500k at least...

Yes, it seems that's the case. I think they were thinking to put the three of us on title but then my dad started talking about forming an LLC - in that case, I'm assuming the name of the LLC would be on the title? My dad has already been speaking with his attorney so I think he's getting more info.

Yes, the auditing part is a bit scary in terms of if we were to agree on buying from them in an off-market sale and coming up with our own price. That would take quite a bit of round-tabling....

Thanks Arlen! I will definitely encourage them to continue seeking legal advice for something like this. My dad said that if we don't want to accept the gifting of this, due to tax concerns, he would likely just 1031 exchange these properties into a DST (Delaware Statutory Trust) otherwise.

As far as buying the property, I'm not sure... I suppose we could try to do that but it's already complicated given the situation I'm in with them (we live in another one of their 1031ed properties) as Tenants in Common, and they are encouraging us to take a loan against the trust in paying this back. Further complications arise because it's not just me but my brothers who would be involved with all this. When you say "fudge" factor what do you mean exactly? Like they could sell us the home for whatever we agree on even if it's not "market" price? I'm not sure why we would want to buy the property and take a loan out otherwise... unless they sell it for extremely low and only one of us (brothers) buys, I don't see the benefit to doing this if we're considering a cashflow investment.

As far as high net worth, I think they are. Funny thing is that they don't like talking about what they're worth -my mom especially is paranoid about this. I'd have to guess at least in the multi-millions though. Now, whether this is considered "high net worth" might be subjective depending on who you talk to as well...

Hey guys,

My dad just threw an unexpected curveball at my two older brothers and I, saying he wants to reduce his and my mom's tax liability/burden by unloading one of his properties (a 1 bed condo/apartment unit on the lower level... although every unit I've looked up on Zillow/Trulia/Redfin/etc seems to indicate that these are all 2 bed units... not sure how they're coming up with that unless they're considering the living/dining area to be the "second bedroom") which is local in the town my parents and one of my brothers lives in up in the Bay Area. It's a 15min drive away so super close to both my parents and one brother. The unit is fully paid off and has appreciated quite a bit I'm sure. I don't know what they paid for it but it's probably worth at least $450k now. They've probably flat-out owned it since at least the 90s, if I had to guess. By "unloading" he means transferring (and presumably gifting) title to my brothers and I so all our names are on the deed. From there, we could decide what we want to do and either continue renting or sell.

Currently, he told us he's renting it out for only $1200 a month. HOA dues are $375 and property tax is encroaching $1700 a year. So the profit margin is low already from what I've gleaned. Fair market rents in that area are maybe $2k based on just looking around online. And the city they're in is rent-controlled to where you can't raise rents for over 5% without getting mandatory approval.

So far one brother has expressed interest in just taking over the property and continuing renting it out. I mentioned raising rent but he was reverting back to "the current tenant is good and pays rent. Don't screw it up" - I then reasoned with him on the basis that if every other neighbor is paying $2k~ in rent and this tenant is the only one paying $1200, it's likely there's quite a lot of headroom for rent increases before they would ever consider moving out. And if we abide by the 5% rent increase rule, we should slowly be able to increase rents in accordance with the city while not pissing the tenant off so much that they'd want to move out. The other option of course is to evict the tenant and bring in a new one and renting according to current fair market rent. My parents, I think, just wanted a mostly trouble/hassle free rental and aren't landlord types of people (they often accept CASH as a form of payment...ugh). I don't know if they've ever raised rent on any of their tenants and like to think they're doing people favors by giving them a huge discount... I guess it's worked out OK for them? From their perspective, it seems they don't care about this form of income based on how much money they've accumulated and saved over the years. Ironically, it seems real estate is a 'minor' asset for them based on all the discussions I've had with them.

My dad was saying we should just sell the place once it's under our names and reinvest the money in some other property... not quite sure how that would work to our advantage in the Bay Area, considering how crazy housing prices are. Plus we'd get hit with additional taxes wouldn't we? My brothers both aren't investor types (AFAIK) so reinvesting the money out of state likely wouldn't be a possibility for them. If anything, they would likely want to cash out their shares and take the money.

Given this situation, I was looking for feedback on what you guys would do or if there's something that's a flat-out given/no-brainer (like "Yes, keep it, raise rent and keep renting it...) based on what I've shared so far. Or if any of you have been in this type of situation, what you ended up doing and if you'd do anything differently.

Well, without actually having done any proper valuation, from what I know and have heard, it sounds like my father-in-law has committed to a purchase price of 32% *under* his asking price. Based on the asking price, I'd guess the valuation was probably slightly high but the agreed-upon price seems to put them in the ballpark of what we *think* their annual income/profit has been. Because this all happened way to fast, and my in-laws seem desperate to offload the business, we didn't even have a chance to review things with them (not that they would ask us for help with that anyway). The good news is that this will be one burden lifted off their shoulders. The bad news is that they are averse to planning ahead with their money, which is a really scary thing. 

One more thought that came to mind is if my brothers will want a piece of that cashflow OR if we would have to factor in higher interest because we're technically borrowing from their inheritances. Of course, my parents are the ones who ultimately determine all that but I would think they might want to be fair about it all. I think we'll have to discuss that part more in terms of "what's fair" and what that might practically look like in terms of interest or splitting cashflow. 

 Thanks! I actually just found the restaurant on bizbuysell! Lol... so it seems they *might* have done a proper valuation - they have a broker who is listing on their behalf, and I think it may be the landlord's broker. I think the landlord is on their side and wants to see them get a good sale. Still, I think it would be good for us to get the average of their past few income statements and get the rough valuation x2 or x3. I'm curious how negotiations usually go if owners are seeking 3 times earnings when buyers only are willing to pay 1-2 times. Do they usually 'meet in the middle' like 2.5x earnings? Otherwise, what criterion are used as 'bargaining' chips when negotiating that part?  

Yea, I wish my in-laws could be absentee owners but I don't think most of their staff is trustworthy or reliable. Out of all of them, less than a quarter probably are.

If the owner chooses to finance, can they usually justify closer to their sale price versus the buyer's asking price via all-cash buyout? This might be an option for my in-laws since a monthly cashflow wouldn't hurt for them. And will buyers usually be willing to go the financing route if they're leasing and also owe the landlord rent?