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Author: Opv1419 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121565  
Subject: Rent-to-own, of sorts Date: 3/19/2014 3:22 PM
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A relative of mine has owned some rental properties since 2003. I just became aware that he has had an informal agreement with his son (the renter) that he will convey the house to him after an agreed upon amount has been paid. There has been NO formal Rent-To-Own Agreement, only an informal understanding between the two of them. His son has continued to pay timely and the agreed-upon amount is expected to be paid in full early next year, at which time his dad currently plans to do a simple conveyance thereby placing the house in his son's name.

Once I learned of the above arrangement, a zillion questions began twirling around in my head. Could it be as simple as explained above? Are there tax implications, both pertaining to how the income has been reported to this point (and continues to be reported) and to what happens when the house is actually conveyed to the son?

Thanks,

Opv
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120510 of 121565
Subject: Re: Rent-to-own, of sorts Date: 3/19/2014 3:52 PM
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Could it be as simple as explained above?

Apparently, yes.

Are there tax implications, both pertaining to how the income has been reported to this point ...?

Yes.

... and to what happens when the house is actually conveyed to the son?

Yes again.

Without anything in writing, to me it sounds like several years of rent followed by a gift.

--Peter

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Author: Opv1419 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120511 of 121565
Subject: Re: Rent-to-own, of sorts Date: 3/19/2014 4:07 PM
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Thanks. I would like to give my relative sufficient warning if it is warranted, i.e., if he is going to be in for a major tax surprise once he gifts the house to his son next year. I recall many years ago that my parents gifted the old homeplace to me and my four siblings equally in a "share and share alike" arrangement. Back then (in Alabama anyway) the house was conveyed "in consideration of ten dollars...." and once the document was filed, the house was ours and we basically just began paying the taxes and upkeep on the house after that point, until the house was later sold, at which time we each had to calculate a capital gain/loss on our taxes for that year. There were no capital gain/loss for my parents and no gift taxes for the children.

You answered each question in the affirmative, that there are tax implications. Can you elaborate a bit?

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Author: HitAnyKey42 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120512 of 121565
Subject: Re: Rent-to-own, of sorts Date: 3/19/2014 4:51 PM
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I'm actually curious to the answers of the questions in this thread as well. Since the condo my wife owns is currently being rented (at a loss) to a friend of hers and the hope is in a couple years that her friend will be able to buy the condo.
The other thread I started already has the questions about how to deal with the rental loss itself and depreciation, which I'm still trying to figure out. But that's not for this thread. :)

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120514 of 121565
Subject: Re: Rent-to-own, of sorts Date: 3/19/2014 7:37 PM
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Opv1419: "Thanks. I would like to give my relative sufficient warning if it is warranted, i.e., if he is going to be in for a major tax surprise once he gifts the house to his son next year. I recall many years ago that my parents gifted the old homeplace to me and my four siblings equally in a "share and share alike" arrangement. Back then (in Alabama anyway) the house was conveyed "in consideration of ten dollars...." and once the document was filed, the house was ours and we basically just began paying the taxes and upkeep on the house after that point, until the house was later sold, at which time we each had to calculate a capital gain/loss on our taxes for that year. There were no capital gain/loss for my parents and no gift taxes for the children.

You answered each question in the affirmative, that there are tax implications. Can you elaborate a bit?"


I am not Peter, and he does this tax stuff better than me, but here goes anyway.

For federal tax purposes, the gift tax requirements (filing and payment of gift taxes, if required) fall on the donor - your relative.

Gift tax filing will be required for a gift larger than the $14,000 annual exclusion amount. If you relative is married, then a split gift with the spouse is possible and that would become $28k. If the relative's son is married, then also gifting to his spouse would double that to $56k.

You never mentioned the value of the property. Unless the place is a McMansion or exotic, expensive estate (or your relative has previously used his lifetime exemption amount), it is unlikely that your relative wouldd actually owe gift tax; more likely he/she might use some of his/her lifetime exemption amount.

State Gift taes would be a potential question for your relatie and his sone, and I have no comment to offer regarding the possible state gift taxes, other than somes states have them.

You did not mention the value of your old homeplace, but you did say that both your parents gifted to you and four siblings, so two donors by five receipients would mean o gift tax due from your parents if the place was then worth less than 10x the then annual exclusion amount (many years ago when the gift was completed).

Regards, JAFO

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Author: Opv1419 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 120517 of 121565
Subject: Re: Rent-to-own, of sorts Date: 3/19/2014 10:42 PM
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Thanks.

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