Home sale to related party by aged parent

[Mike12321]

Very elderly parent purchased a home for his adult child but he is the owner. He wants to "sell" the house to the child but the child can only pay 50% of the cost. He wants to accept a promissory note for the other 50% but expects to turn over the other 50%/forgive the note in his will. Sale price is approximately his cost. I understand no loss can be reported. He does not live in the house. Child does not pay rent.

How would this sale be reported on the father's tax return? Child will not be making installment payments, just signing a promissory note. Is there imputed interest? 

What would be a better way to make this transaction? I am assuming he only wants to leave the child only the value of 50% of the house. He may want the cash for the other half now, although he is well of and may not need the cash. There are other children in the family so he has to be fair in their treatment.

[Terry53029]

I think I would advise the parent just to keep home as a second home, and put it in a living trust. At the time of parent passing the beneficiaries will get step up in basis.

[BobKamman]

Or if he wanted to avoid the expense and complications of a living trust, just give it to the kid in his Will.  Trusts are not a panacea for situations like this, where many people would feel sorry for both the parent and child (not to mention the siblings).  

[Terry53029]

Probate is a lot more expensive than setting up a simple trust

[BobKamman]

@Terry53029  "Probate is a lot more expensive than setting up a simple trust"

Not where I live.  Perhaps in states with archaic laws like New York and California -- unfortunately, where many of the national media are headquartered, with writers like you who think there is a federal probate code.  And it's absurd to suggest putting one asset in a trust, while leaving the rest to be probated.  

Where I live, though, it's a misdemeanor for tax preparers not to report elder abuse or elder neglect to an agency that investigates it.  The scenario here certainly waves a few red flags.  

[Terry53029]

@BobKamman In WI you do not need a trust or a will to by pass probate, but you do need to have the property filed with deed registered with  “Transfer on Death” (TOD) designation, which usually needs the help of an attorney. I am not going to get into all the benefits of a trust, but they do more than just avoid probate. Bob you don't even know me, so how can you say what I believe. "writers like you who think there is a federal probate code:

[itonewbie]

@Mike12321What exactly is the parent hoping to accomplish with this arrangement (that is not the most straightforward), especially if estate tax exemption is not a concern?  If it's just the transfer of ownership, perhaps there's a certain driver for that desire?

[BobKamman]

@Terry53029 

Arizona is also one of the few states with beneficiary deeds.  I just prepared a revocation of one a few days ago, for the surviving spouse of a couple who thought he would be the first to die and the wife would outlive him and remain in the house. Instead she died first and the house is being sold.  When there is only one beneficiary, it can be a useful tool -- but of course, it's a public record (just like the names of trust beneficiaries in most places).  

I assume everyone who gives "one size fits all" advice about estate planning believes there is a federal probate code. It's like someone in New York City telling someone in Oshkosh not to carry a gun.   

[Mike12321]

From what I know of the client I don't see any aspect of elder abuse. I don't know the reasoning for his purchasing a house for his child to live in, but I think he wants to transfer the ownership to the child but apparently doesn't intend to leave the child the full amount of the value of the house. The child is going to pay for half the value and then he said he would forgive the promissory note for the remainder half in his will.

I also suggested he just leave the house to his child in his will, but I think that messes up what he intends to divide among his children, so that is why he is seeking some payment also. He may just feel more comfortable getting the deed transferred now.

I have seen where this could be an installment sale with the first 50% reported and then it is likely there won't be another installment payment. Then there would be a need to report interest on the note reported on the return each year, whether or not he actually receives it. He suggested a 2% rate, and when I looked the federal rate was just below that around 1.87%. Does that sound right? I did ask him to check with a lawyer to seek his opinion on how to best work this transaction.

[taxes96786]

What your client is proposing is not a good idea, in my opinion. It will affect the child's basis down the road. Any transfer of the property should be on death to insure a full step-up of basis to the child.

In Hawaii we can do a Transfer on Death for property that gets notorized. The child then only needs to present this form and a death certificate to the assessors office to put the property in his/her name. This eliminates including the property in a will or trust and the delay of ownership transfer.

[abctax55]

Gifting is often used as an over-all strategy to reduce the value of ones estate & the resultant estate taxes. 

Yes, the beneficiary is "stuck" with the lower basis but may be in /is likely in a lower tax bracket.  

[taxes96786]

There is no tax to the transferee whether gift or partial purchase. And, true, that person may be in a lower tax bracket at time of transfer but, in this case, it appears that the son is already living in the house and any transfer now by gift or purchase would seriously impact his basis in the future should he decide to sell.

Of course, all this won't matter if Biden goes through with his intention to eliminate step-up in basis.

[abctax55]

There is no tax to the transferee whether gift or partial purchase.

No one said there was; my reference is to attempting to mitigate ESTATE taxes.

[taxes96786]

@abctax55 and my references were to tax consequences dealing with basis of property in the future.

[BobKamman]

@taxes96786  "The child then only needs to present this form and a death certificate to the assessors office to put the property in his/her name."

Well, not exactly.  The Transfer on Death Deed should have been "presented" while the owner was still alive.  It must be recorded before the transferor's death with the bureau of conveyances. It can be revoked, but it's public record, which may or may not be acceptable to the donor and recipient.