Contract for Deed versus Gifting Land

[2bannans]

Planning to buy land from my parents to build a house. They want to do a contract for deed, but in order to build a house on it, the contract for deed, would be added to our mortgage at the time the construction is complete. We don't want to do that because with the contract for deed, they won't be charging us interest.

The mortgage person said that we could try to get the land gifted to us. But I'm conserned on how the gift tax works. The land is valued (tax value) at $110,000. It will probably appraise for much more. Anyone give us some insight? Also this is in Minnesota. Thanks

 

[tranquility]

The main problem with a gift is you take the basis of the owner. In long held land, that tends to be quite low. The gift amount is the FMV and not the tax valuation. But, unless the parents have gifted a lot over time, even if the property is worth a lot more than $110,000 there is probably not going to have to be any tax due; just a requirement to report it.

In a contract for deed, interest must be charged. If they don't, it could be considered a gift to you and they still have to report an "imputed" interest income on their tax return. But, since the imputed interest will probably be less than the yearly allowed without reporting, a gift tax return will probably not be required.

 

[2bannans]

This land has been in the family for a LONG time. I'm not even sure how long, like probably 100 years. So how would there not be any taxes due on the gift of the land? Who would be best for us to talk to, to get this figured out?

Thank you for the help!

ETA: What does FMV stand for? Also they haven't gifted anything (at lesat that I'm aware of). I'll have to ask about this to make sure, but if they haven't then there wouldn't be any tax due, now is that for both state and federal?

 

[FlyingRon]

How long it's been in the family is meaningless. In most cases if the land is inherited the basis steps up to the FMV at the time of the owner's passing. As pointed out, gifting doesn't affect the basis. You'll have to trace back the previous transfers to see what the basis is (along with any intervening capital improvements, etc...).

A sale (contract for deed or whoever else) will have to be at the FMV (now typically, the sales price is the current market value, except when the transaction is contrived). That will mean a capital gain (from your description I assume that this gain could not be excludable) for the seller and the buyer gets the sales price as his basis.

If the land is paid off otherwise, rather than a contract for deed, just have the parents carry a mortgage. You might do better shopping for the construction mortgage to see if they will agree to subordinate their lien behind the traditional mortgage.

 

[tranquility]

This land has been in the family for a LONG time. I'm not even sure how long, like probably 100 years. So how would there not be any taxes due on the gift of the land? Who would be best for us to talk to, to get this figured out?

Thank you for the help!

ETA: What does FMV stand for? Also they haven't gifted anything (at lesat that I'm aware of). I'll have to ask about this to make sure, but if they haven't then there wouldn't be any tax due, now is that for both state and federal?

Gifts are only taxable if the total lifetime amount gifted is over the unified amount. This is in the millions. In a contract for deed, they are selling the property to you and capital gains taxes may be required. (Depending on if they live there or not.) Your basis in a gift is the donor's basis, in a contract, the amount of the contract.

FMV is "fair market value".

 

[2bannans]

Gifts are only taxable if the total lifetime amount gifted is over the unified amount. This is in the millions. In a contract for deed, they are selling the property to you and capital gains taxes may be required. (Depending on if they live there or not.) Your basis in a gift is the donor's basis, in a contract, the amount of the contract.

FMV is "fair market value".

They don't live on the property. It is just an empty lot. What does unified amount mean?

So if they gifted us the land, and FMV is say $300,000. There would be no tax on that?

 

[tranquility]

Google it. You seem to be asking the same question in each instance. Perhaps you should pay a person to explain it to you.

 

[2bannans]

Google it. You seem to be asking the same question in each instance. Perhaps you should pay a person to explain it to you.

I have been googling. That is also why I asked who can I talk to about this. No need to be snarky.

 

[Zigner]

I have been googling. That is also why I asked who can I talk to about this. No need to be snarky.

The answer wasn't snarky. It was a perfectly valid response to several instances of the same question.

 

[2bannans]

I'm sorry I don't understand Gift/Estate tax. Would we be best talking to tax person or a real estate attorney?

I actually missed a couple of the responses in the thread. Sorry I took that as snarky but I'm just trying to figure out what our options are, and about how much the taxes would be.

And thanks Flynn, for that other option with the mortgage. Another thing I can look into. Appreciate all the feedback, and sorry for the dumb question.

 

[tranquility]

Your concern is about taxes, ask an accountant, EA or tax attorney. Any should help you. When the actual transfer happens, either by gift or by contract, see a real estate attorney to properly complete the deeds. If parents are rich enough to care about the unified amounts of $5 million or more, they should see an estate attorney who can probably handle all aspects.