Q: My father has some very large capital losses on his investments and as a result has a huge tax credit coming to him.
On the other hand, My husband and I have made an investment in a real estate venture in Florida and we stand to gain 400 percent on it.
Is there any legal way we can utilize the tax credit my father has? If we were to sell the holding to him before a buyout price is offered could that be considered on the up and up?
Does the transfer have to take place prior to a buyout offer being made? Please help, as my family has already paid the government our share of taxes for the next 10 generations!
A: Your question raises some interesting tax and legal issues. Essentially, your father has a capital loss and a tax credit. You and your husband have made a real estate investment and stand to make money.
Normally, one individual cannot use the capital loss of another, according to Murray Green, an accountant at FGMK (www.fgmk.net), based in Bannockburn, Ill.
You could sell your father the property, but you’d have to do an “arm’s length” transaction in order to square it with the IRS. That means you’d have to get an appraisal for the property that comes close to the fair market value. If you sell the property to your father at a very low number, and he turns around and sells it for the true market value a week later, the IRS will probably flag the sale and perhaps ultimately unwind it.
Did you and your father have an agreement that you and your husband would purchase the property in Florida as the front people but that he would be a part owner of the property?
Green recently worked on a case where a mother bought an apartment in a hot building in Chicago at preconstruction prices. She later signed an agreement with her children making them owners of the property. When she closes on the deal, her children will actually be the owners, Green said.
If this is similar to your situation, you will need a good accountant and an attorney to draw up the papers. But you have to understand that this means your father will now own some or most of the property.
If you want more of the cash, he will have to decide whether he wants to give it to you, and if he does, he will be limited in how he can give it to you without affecting his future estate.
Current tax law permits anyone to give anyone up to $12,000 per year, so your father could give you and your husband a maximum of $24,000 in cash each year.
There may be more exotic answers to your problem than this, but Green says finding them could be costly.
If you’re only going to make $100,000 on the deal, it may not be worth paying a lot of money to develop an exotic tax strategy,” he said. “If you’re going to make millions, it might well be worth it.”
You may also have to separate the issues involved. If you’re looking to defer paying taxes on your real estate investment, you may want to consider a 1031 exchange.
With a 1031 exchange, you would sell your investment property and use the proceeds from the sale to buy a “like-kind” property. This allows you to defer the gain on your investment as well as defer paying any taxes owed on that gain.