I'm in the process of buying my first home from my parents. I'm trying to figure out the best way to get around them paying capital gains. Is it "legal" to have them add me to the title, then have them do a quit claim deed to take themselves off the title and then I turn around and refinance the home, then make lump sum payments to them each year up to the maximum allowable under the gift tax rule? The rules as I understand them are:They have to charge you the fair market value of the house. If they resided in the house for 3 of thelast 5 years then capital gains are forgiven up to $500K on a joint return.However the value of the house (less 20K) is assumed to be a gift to you and reduces their estate tax exemptions by that amount.You have two choices. They can fund a mortgage at the going rate (about 7-8%). tHE INTEREST YOU PAY IS TAX DEDUCTIBLE BUT THEY HAVE TO DECLARE THAT INTEREST AS INCOME.Another approach is to gift you $20K (40K if you are married) each year by adding you to the deed in that amount. Then each year they can deed you a like amount. You can do this before December 1999 and after January 1st 2000 (for 40 or 80K). Then the next gift is on January 2001 (for 20 or 40K). You can sign a fair market lease and pay them "rent" if they want a yearly income. The rent is income but they can deduct maintenance and repairs and depreciation and RE taxes from that rental income.These are suggestions but be sure whatever you do is documented.
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