Advice on buying Grandpa's house

Advice needed

My grandparent is 84 and wants to sell his house worth $400,000 to me for what he still owes on the loan amount of $150,000. He just wants to to live out his years in the house rent free. Then I'll probably rent it out for a while and then maybe someday I will go back to the house and live in it. In trying to shelter from taxes, what is the best way to architect a transaction to establish a higher cost basis? IRS says it establishes based on contract price, so would it make sense to "sell it for $400k" but gift back $250k? Just trying to set myself for when I go to sell it years from now. Thoughts or better ideas?

Reply to
sdolancu
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If you buy the house from him now, that is the worst way for you to save taxes. If you buy the house for $150,000, first your grandparent will incur (but not necessarily pay) a gift tax on $250,000, and you will get either a basis of $150,000 or your grandfather's basis.

The best way to have an increased basis is for you to inherit the house. But if you don't buy it, and you make mortgage payments anyway on the understanding that you will inherit it, then the interest may not be deductible for you.

So some combination of those two things is in order.

37.5% of the house (representing the share that $150,000 bears to the $400,000 full value), and take title as a joint tenant. That way you will legitimately owe the money to the bank, you will be an owner and can deduct the mortgage interest. And then when your grandparent dies you will have a $150,000 basis in your share, and you will get a stepped up basis in the remaining 62.5% that you will inherit.
Reply to
Stuart Bronstein

Some additional thoughts:

  1. are their other potential heirs that may get miffed about this? Make sure you do this, whatever "this" turns out to be, with consideration of all matters, not just tax.

  1. if grandpa gifts the house subject to a life estate, it will not be a gift of a present interest and thus remains included in grandpa's decedent's estate when the time come, and thus entitled to a step up in basis.

  2. if grandpa retains a life estate, he is entitled to rental proceeds, etc. should he move out of the house before his death.

  1. if grandpa gifts the house subject to a life estate, can the recipient the deduct mortgage interest payments as some sort of investment interest?

  2. if recipient is considering buying the house for 0k, does that mean recipient has 0k to pay off the mortgage and clean this up a bit?
Reply to
Reggie

Good advice.

The same result will occur if grandpa gives OP a joint tenancy interest.

A gift of either a life estate or a joint interest will increase the basis on grandpa's death, and will probably give OP grounds to deduct mortgage interest he may pay. However if OP starts making payments on the mortgage, the IRS (if they notice) will want to treat at least part of OP's interest in the house as paid for with sufficient consideration. That part would not be eligible for a stepped up basis.

As long as the life estate actually expires on his death. The paperwork has to be careful to make sure that is the case. Otherwise OP may not get a stepped up basis.

I imagine so - the person is a current owner of an interest in the property.

OP is talking about just making the mortgage payments, not coming up with any cash. There is a risk to that, because when grandpa dies, the lender will likely have the right to call the loan at that time, even if all mortgage payments are current have been timely made. So OP will have to refinance at that point anyway. So OP might want to consider refinancing now.

Reply to
Stuart Bronstein

Advice needed

My grandparent is 84 and wants to sell his house worth $400,000 to me for what he still owes on the loan amount of $150,000. He just wants to to live out his years in the house rent free. Then I'll probably rent it out for a while and then maybe someday I will go back to the house and live in it. In trying to shelter from taxes, what is the best way to architect a transaction to establish a higher cost basis? IRS says it establishes based on contract price, so would it make sense to "sell it for $400k" but gift back $250k? Just trying to set myself for when I go to sell it years from now. Thoughts or better ideas?

===========Why not just buy it for $400k, especially if that's fair market value? He'll only pay taxes on $150k, less HIS basis, due to the $250k exclusion on the sale of residence.

Without knowing his basis, we can't really say what happens on his side.

As this is a transaction between related parties, make certain it is arm's length.

Reply to
D. Stussy

Assuming grandpa's total basis in the house is less than $400k, wouldn't grandpa have to pay capital gains if he sold 37.5% of the property for $150k?

Reply to
Rodney Farber

Assuming grandpa both owned and lived in the property for at least two years out of the last five, he could sell the property for the full $400,000 and pay no tax. The first $250,000 is tax free.

Reply to
Stuart Bronstein

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