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What are the tax advantages to selling income rental property to a family member?

September 13, 2006


From:  Bonnie
Date:  Mon, 12 Jun 2006

What are the tax advantages to selling income rental property to a family member? I own a rental house that I would like to sell to my son.

I can carry the mortgage myself.

The value of the property is about $200,000.

Answer

Date:  Wed, 14 Jun 2006

Hello Bonnie,

There are advantages and disadvantages of selling property to a family member.

You should consult a tax advisor to see if it makes sense in your situation, including the terms of the note.

You should also have an attorney help you with documenting the transfer and deed of trust.

Advantages

Future appreciation and future income from the property wonít be included in your taxable estate, if you have one.

If your son uses the property as a principal residence, he will be able to claim the homeowner exclusion of gain when he sells it in the future.

You will be taxed at the low federal tax rate that currently applies to long-term capital gains (15%, expiring after 2010).

Your son will receive a new depreciable tax base.

You will receive cash that you can reinvest or use for your personal living expenses.

You wonít have to continue maintaining the house, including worrying about whether a renter will damage it.

Disadvantages

You will lose control of the house, including who will own the property after your death.

You will lose the cash flow from renting the property.

Children often donít honor their obligations to make payments on loans payable to their parents. Itís hard to foreclose on a mortgage from your children.

You should have the house appraised to determine a fair market value for the property and use it for the sales price.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

What are the tax advantages to selling income rental property to a family member?

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