I have a friend who's aunt owns some land in North Carolina. The tax value of the land is approx 60k. The aunt has agreed to sell it to the nephew for 70k. There is no "cost basis" as the aunt inherited the land. We're brainstorming on how to legally minimize the taxes for the transaction. Any ideas on how to structure the deal?Concerns for the aunt are capital gains taxes. The nephew is concerned about triggering the gift tax. Anyone had any experience dealing with applying the Unified Credit to the Gift Tax (IRS website)?The aunt trusts the nephew, so the payments-over-time option is also available. She just doesn't want to incur a hefty capital gains tax when the land is sold. Any thoughts would be greatly appreciated.Xposted to tax board.Stetson20
Under Federal Law, your aunt's cost basis for the land is its fair market value usually on the date of death of the person she inherited it from. Appraisers in the area should be able to come up with a figure for you based on other similar land sales nearby in that time frame.If she inherited the land recently, the capital gains due on selling the land could be minimal.As to selling the land to a relative, you might want to get the advice of a tax expert. If the land is worth far more than $70K, yes, there probably are potential penalties. And there are indeed limits on how much she can gift each year without triggering gift tax. But a tax expert can help. Often the property is owned in shares, and she would be able to gift a share every year. She can also sell it for a downpayment and then take a mortgage and forgive a protion of the mortgage each year.
Not really sure these work but some idea's you can check into further.1a.) Aunt sells the property on a note to nephew. If she doesn't need the money right away and would be just as happy with an income stream she could say $7k down and $500 per month for 15 years with no prepayment penalty (approx 5% interest). I believe long term capital gains (15% federal) will be owed on the principal part of the payments and income tax rates on the interest part but since she is getting them over time that really isn't such a big deal. Besides this seems to me to be what is really happening. 1b.)Actually if her tax rates are significantly less than his and he wants to hold the property long term it might behoove them to raise the interest rate and lower the selling price in order to maximize write-off for him. Example purchase price $50k with $5k down and payments of $500 over 15 years equals 10.6% interest rate. However in this case there would need to be some prepayment penalty (maybe 20k in the first 5 years, 10k next 5, 5k last 5). More complicated and harder to explain this way. 1a is probably better for most people.2.) Aunt transfer property into a trust, value 70k. Trust sells property to nephew for 70k and invests in the market, bonds or whatever she wants. Aunt gets perpetual annuity like payments from the trust which will be partly capital gains tax and partly income tax rates. The main benefit vs. option 1 is the aunt gets to invest the entire 70k elsewhere immediately instead of having to carry the loan. One problem with this I can see right away is the amount is probably to low to warrant the fee's (3-5k?) it will cost to set up the trust.3.) Aunt gifts 15% of property to nephew each year. Nephew gifts $10,500 to aunt each year. Not sure this one is legal. This would take 7 years to transfer and could run into problems in an audit. If their is a neice and uncle also in the picture each could gift 15% and $10,500 per year respectively cutting the time involved down to 4 years (well really as little as 3 years and one day). 4.) Aunt sells property to nephew and 1031 exchanges it into a TIC (typically make about 7% per year on your money in perpuity). Nephew gets his own loan or apys cash. Tax continues to be deferred for Aunt.Personally I lean towards 1a. However, you need to contact a tax professional before doing any of the above. Asking on the tax strategies board might be worthwhile also.
I see pauleckler interpreted the situation and goals completely different than me. I assumed the property was actually worth 70k and that she got it as an inheritance a long time ago and that she probably had less income than he. Lots of assumptions I inadvertantly made. Guess it was some treasured little old aunt and successful young stud predjudice showing through.Anyway if you give us a little more info on their financial situation and goals we might be able to steer you better. Pauleckers suggestion was a good one provided it is a situation where the property is actually worth more than 70k but she only wants 70k for it.
Stetson,One property we bought was an estate. The son was very interested in our idea of his taking a note because that way he only got taxed on the money as it came in. So instead of getting taxed on the $225,000 all at once, every year he owed income tax on the interest and inheritance tax on the principal paid. He chose to go with an interest only option that ballooned in 7 years to defer any of the inheritance tax until he retired and was in a lower bracket.I know this doesn't exactly match what you friend's aunt is facing, but perhaps something similar would apply?IP
SM thanks for the thoughts. I'll pass it to my friend.Stetson20
Thanks for the post, I'll pass it along.Stetson20
sailrmac,I see pauleckler interpreted the situation and goals completely different than me. I assumed the property was actually worth 70k and that she got it as an inheritance a long time ago and that she probably had less income than he. Lots of assumptions I inadvertantly made. Guess it was some treasured little old aunt and successful young stud predjudice showing through.Anyway if you give us a little more info on their financial situation and goals we might be able to steer you better. Pauleckers suggestion was a good one provided it is a situation where the property is actually worth more than 70k but she only wants 70k for it.I don't know the particulars. I do know that there are similar parcels on the market in the area (within a mile or two as I'm told) for around 3 times as much. I think the other parcels are priced higher as the sellers are targeting developers for subdivisions. My friend wants to keep the property in the family and simultaneously stave off development in their area. I don't know his aunt's financial situation. My suggestion to him was to figure in the taxes, lower the sales price, and pay the taxes as part of the deal. I am not sure if that gets into the 'gray area' for property value.For example: 70k asking, offer 85% with buyer paying the sales tax. Again, I don't know if that's viable, but I am passing all recommendations to him. He may elect to come join the boards after our discussion this afternoon.Stetson20
IP, thanks for the thoughts. I'll pass them along also.Stetson20
Aunt gifts 15% of property to nephew each year. Nephew gifts $10,500 to aunt each year. Not sure this one is legal.A quid pro quo transaction is a sale or barter. Nephew is giving the $11,000 with expectation of getting shares in the property; aunt is giving shares with the expectation of getting money. The IRS would deem it a sale and cap gains tax would be due.
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