Rental Property Basis

[martin-kathryn8]

My client added their son to the rental property title and they refinanced the mortgage to include both parties. He is listed as 50% owner, but didn’t actually purchase anything. They are splitting the property income and expenses now.  It doesn’t seem like he would really have any basis in property, is that correct? Or would they treat it as a gift? If it is a gift, do I just transfer half parent’s current basis to the son?

[itonewbie]

Has his name been added to the title?  If he's on the mortgage now, it sounds like he would have an economic interest in the property as an equity owner, provided he does, indeed, pays down the mortgage (and is responsible for other expenses related to the rental and maintenance of the property).

In order to determine whether there was or the extent to which there was a taxable gift on the encumbered property, I'd ask a couple more questions.

1. Does the mother intend for 50% of the property to be gifted to the son?
2. What was the mother's adjusted basis on the property?
3. What was the property's FMV?
4. What was the amount of debt assumed by the son?

The above would then establish the son's basis in the rental property.

[martin-kathryn8]

Yes, his name was added to the title and he does have an economic interest in the property.

1. The intent is to have the son inherit the entire property in the future. I think the intent in adding the son to the property now was to be able to refinance to take some equity out and fix up the place. 

2. Mother's adjust basis is $262k

3. FMV $840k

4. The mortgage on the property is for $650k, which they are both responsible for. Before the son was added and they refinanced the mother's mortgage balance was $580k

[sjrcpa]

He's only going to inherit 50% of it now.

[BobKamman]

If it's in joint tenancy he'll own 100% when she dies, but maybe that's what you meant.  There are rules about gifts of mortgaged property, but I might be thinking of charitable contributions. In any case, these are questions that should have been asked before they acted.  I always tell parents who consider hillbilly probate like this, to hope they don't end up with IRS as a creditor and a former daughter-in-law as a partner.