We have a duplex rental that we would like to sell to our daughter and her husband on a contract... what tax issues could arise out of this?

Asked by Kk, 97202 Thu Sep 29, 2011

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Rich Golze, Agent, Vancouver, WA
Tue Nov 1, 2011
Ok you have a couple issues here:

Capital Gains Tax Exposure and Recapture Exposure.

Provided that you have owned the duplex for more than two years and have not lived in either side of it, you will have exposure from two fronts.

1. Basis - this is the price of the property minus the depreciation plus any improvements to the property - this will be recaptured at 25% capital gains tax
2. Capital Gains - this is the amount of difference between purchase price plus improvements and the sales price to your daughter. This will be taxed at a long term capital gain of 15%

Since you are selling on a contract, there will be a ratio of Interest, and debt payoff - from a tax perspective, interest from the contract will be income to you, and the loan paydown will have to be calculated as ratio of how much is capital gain and how much is depreciation recapture.

I would definately seek some tax advice from a CPA or enrolled agent to figure this out before you structure your deal. Some CPA's would tell you that you have to pay all your tax upfront and others will treat this as an installment sale - which is where you would pay your tax as you receive your money.

You may be better off depending on what tax bracket you are in to sell it to them with a regular loan, carrying back a 2nd if necessary and trading into a Tenant In Common transaction if you are wanting the income.

There are many different paths you can go down with this. I would recommend John Brahms CPA - john@jbbcpa.com

Tell him Rich the mortgage guy sent you! :)
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Kk, Home Seller, 97202
Fri Sep 30, 2011
Jay, We don't need the cash out, so I guess I need to get more info on how to carry the "paper". We were thinking it would be best if she didn't need to get a new loan. And we were wondering if it would delay the taxes on the sale... Can you expound a little on these items? Thanks
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Jay Cook, Agent, Yorba Linda, CA
Thu Sep 29, 2011
It is always best to consult a tax advisor about potential tax issues regarding real estate transactions. Have you considered that this transaction may not be considered an 'arms length transaction' by the new lender? Assuming your daughter will be getting a new loan, you should get pre-approved with a good lender in your area. A non-arms length transaction can substantially increase the buyer's down payment requirement.
If you don't need the cash out of the property have you considered carrying the paper? An installment sale can help to delay the payment of taxes on the property sale. And it will eliminate your daughter's need to get a new loan. Good luck.
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Anna M Brocco, Agent, Williston Park, NY
Thu Sep 29, 2011
When it comes to any tax issues, it's always best to consult with your tax professional, and or, tax attorney.....
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