Hello. I’m new here and know nothing about real estate investment. My son-in-law and I are thinking about investing in this house. The deal is he would take out the loan and I would pay it. In this way he would aquire investment property and it would help me get back on my feet.
Anyhow, a friend of his who invests regularly in real estate told him he should set up a trust as a way to avoid paying capital gains tax. He didn’t say what kind of “trust”. Unfortunately I was not there to hear the conversation. I can’t imagine what he is suggesting.
Can anyone here shed any light on this for me?
Thank in advance for your time.
I bet he’s talking about the private annuity trust. Too bad the IRS ruled there is no deferment for the capital gains when using those set ups.
There are many ways to defer capital gains and some even allow them to be avoided. You’ll need to have a planner review your entire situation to see which one makes sense for you.
You son-in-law will own the property, you will just make the mortgage, is that right? What benefit do you get from this arrangement? If you aren’t his tenant and your rent payment is equal to his mortgage payment, then this deal seems kind of one-sided.
Thanks, BLL. I have been looking into these and so far all I have come up with is the 1031 exchange or if they live there for 2 out of 5 years prior to the sale.
Hello, Dave. Yes, I know it sounds one sided. My problem is that my credit sucks (Divorce) and it will be a little while before I can get financing on my own. Currently, I am living with my daughter and son-in-law (not a good arrangement). So, I came up with this arrangement. They finance the house, I make the payments. This gives me a place to live that would be much cheaper (and easier to find) than rent. It also buys me time to build my credit back up. My gains aren’t monetary. But, what price do you put on “peace of mind”? I felt this arrangement would benefit me and also benefit them greatly. They just got married and I felt that having some investment property would be good for them in the long term.
I guess right now the problem I am having is that I don’t understand why they are worried about Capital Gains Tax when clearly they still stand to make a substantial profit. They would have no out of pocket invested. And if they do a 1031 Exchange or live there themselves for 2 years it only gets better. Am I wrong on this?
Thanks for your help. I am losing sleep over this.
Let your daughter and son-in-law buy the property and pay the mortgage. You become their tenant and pay rent.
If this is the basic structure of the arrangement that you are proposing, there is nothing wrong or illegal here. As long as the rent you pay is a fair market rent or higher, then your daughter and son-in-law won’t have any gift tax issues. An additional benefit to your daughter and son-in-law is that they can purchase the property as a second home and get the lower mortgage interest rate available for owner occupied home loans.
Your daughter and son-in-law will get the tax benefits that accrue from investment rental property ownership. You correctly point out that future capital gains can be deferred with a 1031 exchange, or, possibly excluded completely if your daughter and son-in-law decide to occupy the property as their primary residence at least two of the five years prior to the sale of the property.
If the rent you would have paid for a place to live is the same amount as the rent you propose to pay your daughter and son-in-law, then they will be acquiring an investment asset with little out of pocket cost for ownership and rental operation. As for yourself, with damaged credit, you get the place you would like to live without havng to pass a credit check and other tenant screening criteria. It appears that everyone comes out ahead if you rent from family.
Donating an appreciated property to a charitable trust can be one way to avoid capital gains, but, this setup is only effective for significantly appreciated assets and complete control of the property is surrendered to the trust. Since the property you are discussing is not even purchased yet, putting this property into a charitable trust at this point is probably 50 years premature.
or, you buy it and have them cosign. If no one really wants to be a “real estate investor” this is just simpler.
I agree with Mark, if you are on the note as borrower or co-borrower the lender will report your payment history to the credit bureaus. This will improve your credit score so long as you pay your rent and hence the mortgage payment on time.
BDonahue did not go into any details, so, I assumed that
The deal is he would take out the loan and I would pay it. In this way he would aquire investment property and it would help me get back on my feet.
meant that he had bad or severely bruised credit. If this is the case, then becoming a co-borrower on a mortgage loan may not be affordable, if even possible in this lending market. Remember that the lowest credit score among the individual co-borrowers is used to qualify for the loan and that score is used to set the loan rate and terms.
If my assumption is correct, it would be better for BDonahue to be a renter and repair his credit over the next two years with good spending discipline and a timely payment history on whatever credit lines he has already established.
Dave: You were correct in your assumption. I doubt that it would go through if they tried to co-sign for me.
It’s not that no one wants to be a “real estate investor”. I would love to invest and am planning on doing so down the road. In the meantime, I am doing alot of research and studying.
I even offered to buy the property on land contract or do a lease option. It appears the true problem they are having is with the “risk” factor. Understandable.
Anyhow, thanks everyone for taking the time to address my issues. You have a great forum here and a wealth of knowledge to be gained. Lot’s of reading ahead for me…lol.