Q: My mother owns a two story apartment building in Chicago. She has no mortgage, but she does not want to retain ownership of the property. I don’t think it would be a good idea to sell the property.
How can she “transfer” the property to me and my siblings? My sister and I live in Georgia and North Carolina, and my brother is a resident of Illinois, although he doesn’t live with or near my mother.
I read on your website that if she simply gives the property to us there would be huge capital gains taxes to pay when we sell. Is there any way to transfer this property on a “tax deferred” basis?
Thanks so much and I look forward to your response.
A: There is no way that I know of that your mother can simply transfer title to you without you then having a significant tax issue down the line.
If your mother’s property is an investment property, the only way she could defer taxes on the sale of the property would be if she bought a replacement investment property using a 1031 tax-free exchange. The new property would have to cost at least as much as the sales price of the two-story building she now owns.
But the title to the property would remain in her name. Upon your mother’s death, you and your siblings would inherit the property at whatever value the property has at the time of her death.
If you and your siblings then sold the property, none of you would have to pay taxes on the sale. In addition if your mom’s estate does not exceed 2 million dollars (this year), your mother would not have to pay estate taxes upon her death.
There are at least three ways you can end up owning her building: You can buy this property from your mother, thereby increasing its tax basis, and reducing taxes you’ll pay down the line (although she will pay capital gains tax on her profits, plus she might have to recapture any deductions she took through the years). She can gift it to you. If she gives the property to you, she won’t pay any taxes, but she won’t have any income. The final choice is to wait until she passes and receive the property as part of her estate.
Tax-wise, the best choice would be for you to inherit the property. But if she still doesn’t want to own the property, and she’s looking forward to a long life, you’ll have to explore the other two options.
But there are some important questions to ask before you start moving down this path. First, why doesn’t your mom want to retain ownership? Is she tired of doing all the work associated with being a landlord? Is she tired of maintaining the building, finding tenants, and paying huge tax bills? Does she want to take the cash from the sale and buy something else? Does she want to take the cash and upgrade her standard of living? Does she want to gift the property to her children to see them reap the benefits of whatever they ended up selling the property for?
Here’s another question to ask: Why don’t you think it’s a good idea to sell the property? Because you think it will continue to go up in value? Maybe it will and maybe it won’t. Do think your mom will spend your inheritance?
And finally, if you do keep this property, who is going to manage it? You and your sister, who live out of state, or your brother who lives elsewhere? If you lead busy lives, managing property out of state can be very difficult. It’s a lot more than simply collecting rent checks.
I think you and your siblings need to sit down with your mother and have a heart-to-heart conversation about this building. You should talk about property management (the good, the bad, and the ugly) and why she’s decided to sell. If after having this conversation, you and your siblings still want to own this property, then the three of you should come up with a price and buy it from her mother. You can obtain financing for the purchase and your mother would end up with the cash from the sale of the property.
Then, everyone is happy: You have the property at a new, higher tax basis and your mother doesn’t have to deal with it. (And she has the cash.)
You’ll need a real estate attorney and a visit to your accountant to make sure you’ve got all your bases covered. Good luck.
Published: Nov 23, 2007