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There is actually no formal document that addresses the sale of the house. All he has is a standard Rent-Lease Agreement, which includes no language concerning the sale. So, in effect my brother has just informally agreed to convey the house to his son at the point the cumulative rent paid equals the agreed-upon sale price. Accordingly, my brother has been reflecting all rent payments each year as rental income.

Not a lawyer here, but at some point they really ought to drop a few bucks on one to make sure things are done properly. There's something rattliing around in my gin-soaked brain about the "Statute of Frauds" and the requirement that everything regarding the transfer of real estate has to be written.

On the tax side, I'd welcome input from the pros, but it sounds to me like the transfer will be a gift equal to the market value of the house, with a basis and holding period equal to your brother's, which will reflect depreciation, which he should have been claiming as a rental expense, assuming the son has been paying market rent. Once the son has owned the property for 2 years he'll qualify for the exclusion of gain should he sell.

Rule Your Retirement Home Fool
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