Creative Way To Pay Less Capital Gains, But Is It Legal? Or Even Possible?
You guys were so quick to answer my last question, I can't resist asking another one! Thank you!
My friend & I are going 50/50 on a fixer-upper, to be sold in 6 months. For the sake of lending ease, he's getting the loan in his name and our plan is to split everything 50/50 privately (closing costs, mortgage, improvement costs, fees, etc).
We're not exactly sure how titleing works and don't know if we should put both our names on the title, or if we should just put his (or if we even have an option). If we put his only, would it be possible to transfer the title somehow solely to my name at some point before we sell it so that the profit will be taxable to me only? Or if we put both names, can we remove his easily within the 6 months?
The reason we want to do this is because I am in a lower tax bracket than he is (even with the house's profit), and therefore, will pay less capital gains overall. I also have stocks that I can sell at a loss next year (damn tech stocks!) as well, to help offset the capital gains too. Then we'll have more to split when all is said and done. (Realistically, it probably won't even be over $10K each, so I can give him his share as a gift - and still avoid the gift tax)
Is this legal and/or even possible?
Thanks in advance for your help!
bump
If you do a deal that is less then 12 months you are not going to get hit with capital gains you will be hit with ordinary income tax.
The lender will want the title in his name if he is the one on the loan.
You could sell the property from him to you and forget to tell the lender hoping to avoid the DOS.
If you do more the one deal or if you make more profit then expected the gift tax idea has limited usefulness.
If you really want to delay the taxes so you have more to work with then consider a 1031 exchange. You get to roll the full investment forward minus some transaction costs.
You need to check that the deal will qualify.
Otherwise just assume that the profits are like getting a raise at work. You take it, pay the tax and smile. Spend your time finding more deals and expect the taxes are a indirect sign of success.
John
[addsig]
Speak to a good accountant. Unless you are making more than 40, there are always enough deductions.
And remember- oral agreements on RE aren't enforceable, so whatever you and your friend do, do it in writing, signed and notarized, and make sure your interest is recordable...this keeps friiends from getting forgetful whtn time comes for splitting profits.
Also, think on this: if your friend is signing a HUD 1 saying he owns ALL the property, when he doesn't, he's committing Federal Fraud !!!
You & he might want to have another think about how to do this deal, or he, and maybe you as conspirator, could find yourselves chatting with some unfriendly FBI agents about this.
Thank you all for your input! We figured chatting with you on this forum first before we did anything would help us avoid "chatting with some unfriendly FBI agents". And it certainly has helped... we'll put alot more thought into this, and in the end, may very well just take up John's attitude of taxes being an indirect sign of success. Thanks again everyone!
I don't see why you both can't be put on title, while he is the only one on the loan..
At closing you both sign legals and he signs the mortgage.. Ask your lender I don't think it should be a problem.
I co-own 2 properties w/2 different sons. Each lender was/is aware that I was on title but not on those loans. The mortgage lender always gets to take a house no matter who owns it! No fraud, just fits with our lives, goals, strategies.
I read every week about parents adding offspring to title (bad estate planning) in the RE Mailbag in the Wash. Post. I believe he is a RE Attrny and he never talks about that being fraud in any way.
You do need to know more about tax consequences/fraud on this deal, tho. Plenty of good IRS info. out there on the Net!!