Hello,
First, thank you to everyone who reads this and particularly to anyone who replies to this with advice. I’ll try to make it clear and brief.
Question: What would you do if presented with the following situation, assuming that you were 26 years old, single, have no real property assets, and not adverse to sweat equity?
Motive: I want to buy property owned by my father and stepmother in order to develop the land and hold a 4 family rental unit.
Situation: Dad is getting divorced from stepmom. Dad owns 50% of the property. Everyone is on nice terms, and stepmom wants to cash out. She wants me to buy her out in private sale. Dad is eager in any way to ‘give’ me his share of the real property. State is Maine.
Details:
Total paid amount for property 5 yrs ago: $250,000
Property includes the following three “entities”:
(A) one 4-unit renovated farmhouse w/ horse barn and 8+ acre horse pasture land;
(C) four house lots that can be sold or developed:
(B) one adjacent lot that stepmom owns completly free and clear, and of which she owns 100%. This is not part of the property that the original $250,000 paid for.
Gross monthly rental income for the 4-unit farmhouse: $3,100
Taxes: $5,000
Current debt on property: one owner-financed mortgage at 5% with $185,000/15-out-of-twenty years remaining, and one higher interest loan at 7% with $50,000/10-out-of-fifteen years remaining. Current total payment for both is $1,600.
Fair market value of the three entities:
(A) 4-unit farmhouse: $450,000;
(B) Four house lots: $90,000 each;
(C) Step-mom’s lot: $90,000 (remember my dad does not own any of this).
So… my dad’s wants to ‘give’ me his share (bear in mind that his interest in this property represents all of his net worth), so that with it I can buy out my step-mom (including her 50% interest as well as her fully owned lot) and own the entire three entities. I would then develop the five lots. Building a house on each of the four-included-lots and selling them will result in a net profit of approximately $185,000/lot (this includes building and closing costs, but assumes no cost to me for the lots themsleves). For the fifth lot that my step-mom owns, the net profit would be approximately $95,000 because my step-mom would probably demand that I pay market value, or, $90,000 for it.
Issues/possibilities:
a) dad will pay capital gains if he “gives” me his 50%…
b) IRS will not let my Dad give me his 50%…
c) I (and/or my dad) can live in one of the units of the 4-unit farmhouse…
d) 1031 exchange…
e) $250,000 profit tax exemption if living in house for 2+ years (this would apply to developing the houses: if i were to live in one for 2 years before selling and moving to the next)…
f) commercial depreciation…
g) LLC or C/S corp. creation…
What specifically is the best way for my dad to ‘give’ me his 50% share (including his shear of mortgage debt)? It as been recommeded to me that I just buy out my step-mom and become a partner with my dad in order to avoid tax losses for me or my dad. If this is the best scenario, is there any way for my to take all ownership after that (or over time) without tax consequences?
In conclusion, I basically want to make money as quickly as possible by developing the lots, pay as little taxes as possible, and return more money to my dad than if he were to sell his share now without developing the lots. As a last note, much of the money I will return to my dad could be in the form of a house or vacation house.
Whew…
THANK YOU.
Eli
PS: please ask for more details/clarification if you want them!