1031 Exchange Then Gift To Child
I am doing a 1031 exchange. I am selling one rental property and buying another like-kind property. My son and daughter and law will be living in this new property and will be paying rent and I will file a schedule E with the irs. I am putting 300K down on the new property; all of the proceeds from the relinguished property will go through an accommodator. I will take a loan out for the remaining 400K and the newly aquired property will cost me 700K. After two years of renting the property to my son I plan on giving him the deed to the property. I am going to wait 2 years before deeding it to him to avoid paying cap gains to the irs. Can I do this without paying taxes? If not, is there a way I can sell my old property and use all the proceeds to essentially buy him a house without paying the taxes? I forgot to mention that he will give me 400k to pay off the loan since I do not think I can deed the home to him since I will have a mortgage on the property. My friend tells me the IRS will want their deferred taxes from the old proeprty I sold in the 1031 exchange and that deeding the property to my son will not matter even if I wait 2 years before doing so.
Best to address this question to a 1031 professional accomodator.
In my opinion, you can safely rent to your son for two years as long as you collect a fair market rent. After two years, you are in effect selling the property to your son for the loan balance. This will be a taxable sale, and yes the IRS will want to collect their due.
In addition, the equity you have in the property is also a gift when you transfer title to your son. A Gift Tax Return will also need to be filed with your annual 1040.
Lots of issues here to address with licensed professionals in tax law and estate planning.
It looks as though you have done some homework and your proposed structure is perfect as far as the 1031 exchange code goes. I would consult with a tax attorney or CPA regarding the gift tax issues. You can gift up to $11,000.00 per person per year ($22,000.00 if husband and wife). Gifting all of the property in one year will have gift tax and estate tax consequences and I'm not an expert in this area. The gift to your son will not trigger the deferred taxes from the 1031 exchange.
I am not a loan expert either, but deeding the property to him would probably trigger a due on sale clause. So, you could certainly refinance the property or payoff the loan with cash to avoid any legal issues here. The loan could be assumable, so check your loan documents.
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