Question On 1031 Exchange, Quick Claim, Tax Assesment
Hello,
My wife and I are buying a house in CA with my father who just sold a rental. He is doing an 1031 exchange. The agreement between us is that we are both 50% owners but because of the 1031 exchange he will be putting down 75% of the value and will be listed on the deed as 75% owner. After the home closes my wife and I are going to refinanace the house and give him the 25% to make equal shares. Does he have to be named on that loan because he is on the title?
He is going to live with us for 2 years so he can take the rest of the money out tax free. We initially planned to sell the home at that time but now my wife and I are beginging to think we may want to stay there. What is the best way to remove him from the title? If we quit claim him does the property get re-assesed? Is there some way we can have a "contract for deed" stating that we are planning to take the deed from him in 2 years at the same price as we purchased the home?
Thanks for your help![ Edited by MXman on Date 12/06/2003 ]
It appears that your plan is to use a 1031 exchange to trade a rental property for a personal residence that you, your wife, and your father will share.
Your primary residence is not eligible to participate in a 1031 exchange neither as the relinquished property nor as the replacement property. Your father will need to find another "like-kind" investment property to replace his rental property. He can still refinance after the exchange if he wants to take some cash out of his equity.
Just to answer your other question, though the situation may no longer be applicable, a QUIT CLAIM deed is commonly used when a co-owner wants to relinquish his complete interest is a property to another co-owner. For example, a married couple gets divorced and the wife receives the family home as part of the divorce settlement. The former husband would give a QUIT CLAIM deed to his ex-wife to relinquish his interest in the property. Reassessment might not automatically occur in this situation, but that would be up to the local taxing jurisdiction.
Whether gift taxes become involved depends upon the amount of equity being transferred. The first $11K gifted to an individual qualifies for the annual gift exclusion. Your father can take advantage of his annual gift exclusion to combine gifts totalling $22K per year to both you and your wife. Your father does not file a Gift Tax Return (Form 709) until the total amount of all his gifts given to an individual during the year exceeds the annual gift exclusion.
A gift tax is not actually paid until all the gifts in excess of the annual gift exclusion throughout his lifetime, exceed $1 million dollars (in 2003).
Would we be able to lease it from him for a short time and then have him move in and qualify for the tax exemption? If so how long would that need to be?
Why do you not let him do his 1031 and he then has full title. You then at arms length, no hugging. Lease the property from him and oh yes just for kicks take a option agreement from him to allow you to buy the property sometime within the next two years or so.
He then moves in with you as a person renting a room. You adjust your balance of payments any way you want and let it grind out for awhile.
Play with the title at least 24 months down the road. I would suggest that he might want to Gift to you somewhere in the future.
that way "The Letter of the Law has been Serviced," and you can then proceed on your lawless occasions
coniving Lucius
Here my plan as the old man speaking. I do a 1031 exchange from a rental home to a new more costly home in which I go in partnership with my son and daughter inlaw . We hold title as tentent in common as prorated in equities. I lease the new home to them for one year to meet the like for like exchange. After 1 yr I move in and share the home (on paper anyway) for 2 yrs then sell the home to them or outright and take my equity tax free. Well what do you think? Will that keep the govt. from stealing my money!
I suppose you could work out the proration so that the value of your "share" of the replacement property is at least as great as the sale price of the relinquished property.
You could then work out a lease agreement to rent your share of the property to your son and daughter-in-law for a year or so, though I suggest two years would be safer. If you are really paranoid, go for three years to get past the IRS statute of limitations.
After this period of rental use, you could convert your share of the property to your primary residence and move in. After you have two years of occupancy and the property is sold, the profit attributed to your son and daughter-in-law's share of the property is tax free under the capital gain exclusion rules.
The profit attributed to your share is also tax free, but you will have to pay tax on the depreciation recapture for your period of rental use.
As long as you have somewhere else to live while your son and daugher-in-law are renting your property, you might be able to make the exchange work.
Best consult a professional tax advisor for specific details.