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Buying a House from Dad

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jlcl

Member
What is the name of your state?What is the name of your state? California

I plan to purchase a house from my dad (not his primary residence). The fair market value of the house is $700k, and his cost was $400k.

Is it better to:
1. For my dad to sell the house to me for $400k at cost (so he has no capital gain), and for him to claim $300k gift in his 2006 gift tax return

or

2. For my dad to sell the house to me at FMV of $700k, and for him to recognize the capital gain ratably over 30 years if we do the transaction as an installment sale. So, he'll recognize $10k capital gain over 30 years. He has held the property for over 15 years, so is the capital gain rate 15% over the next 30 years?

Please advise. Thank you.
 


Ohiogal

Queen Bee
These are just questions because i do NOT know the answers in reference to your thread -- but they relate to your thread. I was not familiar with even being able to take installments for capital gains. I thought the capital gains were recognized (or had to be recognized) when the property was transferred unless they were deferred through a 1031 exchange which is the ONLY way I KNOW OF to defer capital gains taxes on investment property.
I do know if property is sold for less than FMV then many times the recorder's office (at least here) requires an affidavit explaining WHY the property was sold for less than FMV.
 

abezon

Senior Member
When property is sold via installment sale, the gains are taxed as the loan is paid. The contract must include a reasonable interest rate. Gains are taxed at the long term capital gains rate. It's currently 5 or 15%, but goes back up to 10 or 20% when the current law expires.

Could dad move into the house for 2 years? He could exclude $250,000 gains that way. Maybe you swap houses for a while?
 

jlcl

Member
Thanks. I read that the seller can not use installment sale method if the sale is to a related person for a depreciable property. Is the sale of a house to me (which will become my primary residence) considered a depreciable property. Since it'll be my primary residence, I can't claim any depreciation benefits. Please advise.
 

LdiJ

Senior Member
jlcl said:
Thanks. I read that the seller can not use installment sale method if the sale is to a related person for a depreciable property. Is the sale of a house to me (which will become my primary residence) considered a depreciable property. Since it'll be my primary residence, I can't claim any depreciation benefits. Please advise.
It depends on how your father used the house. If it was an investment property and he collected rents...then it was depreciable property.

If it was a vacation home, that was for the exclusive use of the family, and no rents were collected, then its not depreciable property.
 

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