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She is 68 yrs old, only income social security. House with no mortgage has been her principal residence for 25 months. She sells to me, holding 30 yr, 8% mortgage, for $ 100,000+ gain without tax on such gain. I leaseback to her for lease pymts substantially less then total of my depreciation, improvements, taxes, mortgage interest. etc. resulting in annual loss on rental investment. 8+ years later, I sell back to her at price which, after recapture of my depreciation, results in small gain.
Or, instead of selling back to her, I terminate lease and I move in as my principal residence for 2+ years, then sell to unrelated party for substantial untaxed gain.

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Hm, what you are suggesting seems complicated. The intent appears to be to put cash in your sister's pocket. The amount of cash would be the selling price, and her gain on sale, being less than $250,000, is untaxed given a reasonable pair of guesses on purchase and selling price.
Now suppose you have a $150,000 mortgage (figure pulled out of the air). It might be less since as an investor you would customarily have to put 30% down. P&I on $150,000 at 8% are about $1100, so this is the ballpark rent you would have to charge your sister in order to make your own mortgage payment. If she is conservative and puts the $150,000 in Tbills at 5%, the money will last a bit less than 17 years. This, as it turns out, is her life expectancy at age 68 if she is at the median.
Have you thought about just giving your sister some money each year? She might be proud and refuse it, while getting it from the bank might be acceptable, who knows.
Clearly, I have not thought this through, but what you suggest, while common, seems a complicated way of effecting what it is I think you want.

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She is 68 yrs old, only income social security. House with no mortgage has been her principal residence for 25 months. She sells to me, holding 30 yr, 8% mortgage, for $ 100,000+ gain without tax on such gain.
This would make more sense with numbers about the FMV of the house. If you pay her more, in total cash and debt, than the FMV, the excess is a gift from you to her. If you pay less, the difference is a gift from her to you. There's nothing wrong, per se, with what you're proposing, but it's hard to comment without all the facts. Of course, the interest payments on the mortgage would be income to her.
I leaseback to her for lease pymts substantially less then total of my depreciation, improvements, taxes, mortgage interest. etc. resulting in annual loss on rental investment.
You need to be careful here. If you're renting to a relative for less than FMV, you don't get the benefit of all normal rental expenses. You also have to be careful of the profit motive requirement. See IRS Publication 527.
8+ years later, I sell back to her at price which, after recapture of my depreciation, results in small gain.
Again, without FMV it's impossible to comment.
Or, instead of selling back to her, I terminate lease and I move in as my principal residence for 2+ years, then sell to unrelated party for substantial untaxed gain.
If depreciation has been allowed or allowable during the rental period, you have to pay a recapture on that even if you do meet the principal residence exclusion. See Publication 523.
TMF ExRO Phil Marti

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The last two replies on this thread indicate why we always want to consider multiple goarounds. Clearly Phil and I had different ideas about who would hold the mortgage, and I think Phil was right and I was mistaken.
If Sister holds the mortgage, which we can assume is 100% of the purchase price, then no large sums of cash are exchanged. What I see are two important things: 1)title now rests with you; 2)property taxes become deductible. Again, I will make some numerical assumptions just pulled out of the air.
Let's suppose the fair market value of the home is $150,000 and that property taxes are $200 a month. Also suppose Sister's SS income is $1000 a month.
Then, Sister is left with $12,000  $2400 = $9600 after taxes, if there is no transaction.
If she sells to you for $150,000 and takes back a mortgage for that amount, then her monthly payment of $1100 from you is income. But her SS income is not taxed, and so her AGI is $13,200, and her standard deduction and exemption are $5500 + $2800, so her taxable income is $4900 and tax $739. So now she has $11,261 after taxes.
Meanwhile, you have expenses of $200 a month taxes, plus interest and repairs. To make it simple for me, let's suppose repairs bring the interest + repairs up to 8% of $150,000. So your total expenses of being a landlord are $2400 + $12,000 = $14,400, which are balanced by rent of $1100 x 12 = $13,200. So you have a loss of ($1200) which may become ($4000) after folding in depreciation. (I'm too lazy to look up the real numbers since these numbers are all fake anyway.) If you are in the 28% bracket, this represents a tax savings of $1120 to you.
So, the major monetary implication seems to be that without the transaction, Sister has to eat the property taxes (or, perhaps, not eat because the taxes must be paid) since she doesn't make enough to itemize, while you can deduct them on Schedule E.
I do not minimize the title question and what sort of friction that might cause. Would your sister really want to give up title for what, according to this admittedly wrong calculation, is $150 a month? And face eviction if you turn out to be an ol' nasty? (Not, of course, that I'm saying you are.)


