How should we best do this so that we avoid future gift taxes? Will there be any tax implication for us next year if we move the property to our son's LLC now?
A: Thank you for being loyal subscribers to Ilyce’s YouTube channel. She has hundreds of videos there to help home buyers and home sellers with their many real estate and personal finance questions.
We’re going to assume that you and your son purchased the rental property together, in your own names. Your son recently set up the LLC to use as the holding company for this and other real estate properties he may own.
On the gift tax front, you and your wife have the ability to give him $30,000 this year without having to file any federal gift tax forms or having any impact on your federal income taxes. Each person has the ability to gift another individual up to $15,000 a year without any Internal Revenue Service issues or the filing of forms. If you and your wife both give your son $30,000 this year and $30,000 next year, that would effectively transfer your share of the property to him.
We assume that when you purchased the property, you paid closing costs and may have had other expenses while you've owned the property. Those expenses would come into play when calculating the tax basis of the property, so we'll set it aside for the moment.
Assuming you and your son each paid $60,000 for the property, when your son transfers the property from all your names into the LLC, you may have a taxable event for IRS purposes. That's because you and your wife are effectively giving away ownership of your share of the property to your son. He'll now own the property on his own.
If your son signs a promissory note to you and your husband for $60,000 at the time of the transfer to the LLC, he’ll have an obligation to repay you the money for your share over the next six months. You could forgive $30,000 of the debt immediately and then you could forgive the other $30,000 in the new year. Your son would probably owe you a little interest, but he could probably pay that from the income he receives from the rent.
This is one solution to the transfer. There are many others, and some are much more complicated. Depending on your income and your tax returns, you might want to talk to an estate planner to go over some of these issues and explore some other ideas that could work to everyone's benefit.
Typically, a parent’s income tax bracket is higher than an 18-year-old son’s. Given that your son is going to be a college student, he might have limited income in any case. With this information, it wouldn’t surprise us if the estate planner advises you to consider owning the property in your name and paying for your son’s education with the income generated from the property. You may get more tax benefits if you have other investments and are in a higher tax bracket than your son. And your son may not get these same tax benefits if he has limited income.
We thought we'd give you a second option to explore, and then you can decide how to proceed. Also, if your son invested $60,000 in the property and you decide to change the ownership structure to own it yourself, you may then decide to repay those funds to your son as well.
Complicating all of this is the way student loans and student aid gets computed by colleges. You'll need to figure out whether owning the building in your name or your son's name makes his chances of getting loans or aid harder. That information will help you decide the best ownership structure.
Sorry we can’t be more definitive about how you should handle the situation, but there are so many variables to consider. Please consult with an estate planner or financial expert to go over your estate, your cash flow situation, your son’s ownership intention and your options to get it right.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.