Tax Implications Of Transfering Property To Children

[Swede67]

What is the name of your state? MN

My father wishes to "sell" me, at well below market value, his cabin on 40 acres of land. He received the land for $16K many years ago and subsequently put a cabin on the property for about $5K and did some additional improvements bringing his total basis up to approx $40K. The market value of the property is approx $100K and he wants me to buy it from him for $30K (an arbitrary figure he made up). He has said he would "gift" the money back to me at $10K/year. His desire is to transfer his posessions to his kids in the event of his death. I question whether this is the best way to meet this objective. Is there a better way? If not, would my basis then be $30K and he would be able to claim a $10K loss? Finally, in case this is of any significance, I am active duty military stationed outside of MN (in Virginia) but I still claim MN as my legal residence.What is the name of your state?

 

[tranquility]

Losses are not allowed on sales between related parties. However, the transferee can take the loss when he sells it. (This previously disallowed loss acts like a decrease in basis on sale.)

The depreciable basis would be the amount you pay for it.

If this was a personal residence, then no loss would be allowed in any event.

 

[LdiJ]

What is the name of your state? MN

My father wishes to "sell" me, at well below market value, his cabin on 40 acres of land. He received the land for $16K many years ago and subsequently put a cabin on the property for about $5K and did some additional improvements bringing his total basis up to approx $40K. The market value of the property is approx $100K and he wants me to buy it from him for $30K (an arbitrary figure he made up). He has said he would "gift" the money back to me at $10K/year. His desire is to transfer his posessions to his kids in the event of his death. I question whether this is the best way to meet this objective. Is there a better way? If not, would my basis then be $30K and he would be able to claim a $10K loss? Finally, in case this is of any significance, I am active duty military stationed outside of MN (in Virginia) but I still claim MN as my legal residence.What is the name of your state?

You should be aware of some things....

If you intend to keep the cabin and land forever its a moot point...but you should still be aware.

If he sells it to you for 30k, or gifts it to you (which gives you his basis) then if you decide to sell it in the future you are looking a fairly large capital gains, and fairly large capital gains tax.

If you inherit the property, your basis is the fair market value at the time you inherit....which would mean MUCH less capital gain should you decide to sell.

 

[abezon]

Unless dad is worried about losing the cabin (perhaps to medicaid?), it's bettter for you to inherit. That way you get a step up in basis to the full $100,000. If you later sell for $120,000, you'll pay taxes on $20,000 of capital gains. If you buy the place for $30,000, your gain would be $90,000 (maybe $80,000 if the related party loss is allowed). You'll pay 4 times the taxes on sale. Isn't that worth paying a little now for a professionally drawn up will/living trust?

Also, dad will have to file a gift tax return for the bargain sale. He likely won't pay actual gift taxes, but he will have to file the paperwork.