Q: My sister owns a rental property in California that had approximately $200,000 in equity. She owes $200,000 on the mortgage. This property is now valued only at about $250,000. She also has a mortgage on her primary residence nearby.

She wants to give me the rental property which will become my primary home. I will assume the monthly mortgage payment.

What are the tax implications for both of us? It seems to me that she is on the losing end here, so would she have a loss? Would she have a big tax bill?

Is there another way we could go about transferring over the property that would lessen the financial impact on us both? Can she just add me as an owner or can she “gift” me $13,000 per year of property value for the next few years?

I guess my real question is how can my sister give me a house with a current mortgage and not get stuck with a large tax bill?

A: The “good” news is that your sister doesn’t have $200,000 in equity. The property is worth $250,000 and she has a loan for $200,000. That means she has about $50,000 in equity.

Your sister could gift you the property over 3 or 4 years, $13,000 at a time. But if this is a rental property, she has probably been depreciating the property over the years. That means she has to “recapture” that depreciation on her taxes.

In other words, simply giving this particular property away doesn’t alleviate the issue of tax. If she has depreciated the property, she may still owe some federal income taxes for that, and it has nothing to do with how much the property sells for or if she gives it away.

Tax issues on investment properties can be complicated. You might think you have no profit on paper, but may still owe federal income taxes on the sale. You may think you have a loss on paper, but may not be able to take any federal income tax benefits from that loss. On these issues you need to work with a good accountant to help sort the many tax issues faced by investment real estate owners.

As far as assuming the mortgage payments, you generally can’t assume a loan under the terms of the mortgage documents. The original loan was given to your sister and her loan documents most likely provide that in case she sells or disposes of the home in any manner the lender has the right to call the loan. This provision in the documents is generally referred to as the “due on sale” clause.

You can continue making the payments, but your sister’s name will remain on the loan and she will be liable for it. But if you take title to the property and the lender finds out, the lender may decide to call the loan and require full payment on the balance owed on the debt.

To make your situation work out, you and your sister have several issues to contend with: First, she needs to figure out how the property has affected her personal taxes through the years to determine the impact the transfer would have on her federal income taxes. Next, she needs to know what restrictions she has on her loan and whether her lender would allow her to transfer title to you. And if she knows these restrictions and decides to proceed anyway, you need to know the risks of having the loan called. Finally, you need to determine if you can afford to buy and own this property and continue to make all the payments that are owed on the loan and for the property.

Start by calling your sister’s tax preparer. You’ll also need the assistance of a good real estate attorney who can prepare the necessary documents and get the title transferred into your name.