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Author: TMFExRO Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121435  
Subject: Re: buy sister's residence & leaseback Date: 1/9/2001 7:39 PM
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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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