Inman Real Estate News
Parents transfer wealth to offspring the smart way
Siblings shouldn't sell investment bringing in $36K annually
Ilyce R. Glink
Inman News
Q: I co-own a property with my four siblings. It has been the residence of my family since 1958 when my parents bought it for $10,000. My parents signed over the property to the kids in 1980 and proceeded to rent it from us for $3,000 per month.
The property had a business in it and was also their primary residence. Now, we are planning to sell it. What kind of tax liabilities are we looking at if we sell it for between $160,000 and $190,000?
A: The question is, why sell a $190,000 property that is giving you $36,000 in income? It sounds almost too good to be true.
Wait, it's your parents and they're transferring wealth to you while they're living in their home. (Nice move on their part.)
Seriously, you and your three siblings have owned this property for a long time, nearly 30 years. If you've been depreciating the property, I'm guessing that it's depreciated to nothing at this point.
You'll owe long-term capital gains tax of up to 15 percent on the entire sales price, plus state tax. In addition, you'll have to recapture your depreciation and repay taxes on that amount. That is to say, you received tax benefits for having an investment property over the years and when you sell it you will have to repay those benefits.
Since the property is entirely an investment property, you and your siblings could sell it and roll over the proceeds to another investment property and defer any taxes that would be owed. If your siblings don't wish to join you in that new venture, you may be able to roll over your portion of the proceeds, and defer your tax obligation -- for the moment.
If you decide to do this, you'll need to find a company that can act as a third-party intermediary for a 1031 tax-free exchange, also known as a tax-deferred exchange or even a Starker exchange.
You'll need to identify the replacement property within 45 days of the sale of the investment property you have owned and then close on the new replacement property within 180 days of selling the current investment property. These dates are strictly enforced and in some cases are shorter, so be sure you understand the dates involved and don't miss any of the important deadlines.
You'll also need the services of a knowledgeable real estate attorney. Be sure to find one who has done plenty of tax-free exchanges, so you know he or she is aware of all the rules.
For more details about the taxes you'd pay on your property, please see your tax preparer or accountant, or go to the IRS Web site.
Q: I live in Pennsylvania. Unfortunately, I did not have the foresight to have a lawyer review my contract to purchase before I signed it. The closing date for the property is in February.
Here's the problem: The house has been listed in the sheriff's sale three days after our closing. The mortgage company put up the house for sale after drafting the offer, but before the execution date (which was the date they accepted the offer).
Now they've accepted the offer, but the house is still listed in the sheriff's sale. My contract is with the owner of the house, but her acceptance was contingent on her mortgage company's acceptance, and I am pretty sure it will result in a short sale.
The bank I have been working with says it cannot close by the date listed in the contract because it requires my W-2 forms from 2007, which I have yet to receive. This means I will default on the contract and the seller is not willing to extend the closing date due to the sheriff sale.
Is there any way I can back out of the contract now? If I can't, will I lose my deposit and perhaps be taken to court for extra costs of having the house off of the market? Unfortunately I put faith in the real estate agent who I thought was objective (another mistake on my part).
I already had the home inspection and am past the 15 days I had to raise a claim. I was told that because they were a bank they would not work with me at all so even though we found issues with the home (knob and tube wiring, a sagging beam on the front porch) I did not pursue them.
This deal started six months ago, and has been difficult along the way, but this sheriff sale thing has just pushed me over the edge. Is there any legal way to get out and get my escrow back?
I know I messed up, but I was hoping you could offer your opinion. Thanks in advance.
A: You already know that I can't help you in this situation, although I feel for what you're going through.
Tomorrow morning, get on the phone and call a good real estate attorney who can help you save this deal, or at least help you get your deposit money back. Buying a foreclosure is tough enough -- but having this sheriff's sale hanging over your head is overwhelming.
The best thing you can do now is surround yourself with really knowledgeable professionals who can hopefully help you save your deal. Gather together all of your paperwork and see what you can do.
Good luck -- you'll need it.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
***
What's your opinion? Send your Letter to the Editor to opinion@inman.com.
Copyright 2008 Ilyce R. Glink
Siblings shouldn't sell investment bringing in $36K annually
Ilyce R. Glink
Inman News
Q: I co-own a property with my four siblings. It has been the residence of my family since 1958 when my parents bought it for $10,000. My parents signed over the property to the kids in 1980 and proceeded to rent it from us for $3,000 per month.
The property had a business in it and was also their primary residence. Now, we are planning to sell it. What kind of tax liabilities are we looking at if we sell it for between $160,000 and $190,000?
A: The question is, why sell a $190,000 property that is giving you $36,000 in income? It sounds almost too good to be true.
Wait, it's your parents and they're transferring wealth to you while they're living in their home. (Nice move on their part.)
Seriously, you and your three siblings have owned this property for a long time, nearly 30 years. If you've been depreciating the property, I'm guessing that it's depreciated to nothing at this point.
You'll owe long-term capital gains tax of up to 15 percent on the entire sales price, plus state tax. In addition, you'll have to recapture your depreciation and repay taxes on that amount. That is to say, you received tax benefits for having an investment property over the years and when you sell it you will have to repay those benefits.
Since the property is entirely an investment property, you and your siblings could sell it and roll over the proceeds to another investment property and defer any taxes that would be owed. If your siblings don't wish to join you in that new venture, you may be able to roll over your portion of the proceeds, and defer your tax obligation -- for the moment.
If you decide to do this, you'll need to find a company that can act as a third-party intermediary for a 1031 tax-free exchange, also known as a tax-deferred exchange or even a Starker exchange.
You'll need to identify the replacement property within 45 days of the sale of the investment property you have owned and then close on the new replacement property within 180 days of selling the current investment property. These dates are strictly enforced and in some cases are shorter, so be sure you understand the dates involved and don't miss any of the important deadlines.
You'll also need the services of a knowledgeable real estate attorney. Be sure to find one who has done plenty of tax-free exchanges, so you know he or she is aware of all the rules.
For more details about the taxes you'd pay on your property, please see your tax preparer or accountant, or go to the IRS Web site.
Q: I live in Pennsylvania. Unfortunately, I did not have the foresight to have a lawyer review my contract to purchase before I signed it. The closing date for the property is in February.
Here's the problem: The house has been listed in the sheriff's sale three days after our closing. The mortgage company put up the house for sale after drafting the offer, but before the execution date (which was the date they accepted the offer).
Now they've accepted the offer, but the house is still listed in the sheriff's sale. My contract is with the owner of the house, but her acceptance was contingent on her mortgage company's acceptance, and I am pretty sure it will result in a short sale.
The bank I have been working with says it cannot close by the date listed in the contract because it requires my W-2 forms from 2007, which I have yet to receive. This means I will default on the contract and the seller is not willing to extend the closing date due to the sheriff sale.
Is there any way I can back out of the contract now? If I can't, will I lose my deposit and perhaps be taken to court for extra costs of having the house off of the market? Unfortunately I put faith in the real estate agent who I thought was objective (another mistake on my part).
I already had the home inspection and am past the 15 days I had to raise a claim. I was told that because they were a bank they would not work with me at all so even though we found issues with the home (knob and tube wiring, a sagging beam on the front porch) I did not pursue them.
This deal started six months ago, and has been difficult along the way, but this sheriff sale thing has just pushed me over the edge. Is there any legal way to get out and get my escrow back?
I know I messed up, but I was hoping you could offer your opinion. Thanks in advance.
A: You already know that I can't help you in this situation, although I feel for what you're going through.
Tomorrow morning, get on the phone and call a good real estate attorney who can help you save this deal, or at least help you get your deposit money back. Buying a foreclosure is tough enough -- but having this sheriff's sale hanging over your head is overwhelming.
The best thing you can do now is surround yourself with really knowledgeable professionals who can hopefully help you save your deal. Gather together all of your paperwork and see what you can do.
Good luck -- you'll need it.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
***
What's your opinion? Send your Letter to the Editor to opinion@inman.com.
Copyright 2008 Ilyce R. Glink