Transfering Title, Probate & Capital Gains - Please Help.
This is going to be an exploration in learning.
My situation is probably both common and unique. I'll outline things as plainly as I can.
1. My Aunt-In-Law, my wife's mother's only sister (confused already?) lost her husband 3 years ago.
2. No will, no living trust, he managed the finances
3. She was made Administrator to the Estate through probate and intestate.
4. Aunt is "not all there" in the head but is also not legal insane.
5. She's performed a Power of Attorney with my Mother-In-Law
6. Aunt-In-Law was not on the title of the property owned by deceased husband
7. Property with $120,000+ market value has $13,000 loan remaining
8. Deceased husband didn't pay Aunt's taxes '82 thru '89
9. Aunt is beneficiary for property and will receive after probate
10. Aunt owes $40,000 in taxes, penalties, interest. (Working on getting penalties abated)
11. Remember Aunt isn't "all there" so Mother-In-Law (One with Power of Attorney) was going to sell house.
12. Aunt has not lived in house for past 2 years. Capital gains will apply if sold.
Question: Is there a way to transfer a property to relatives without Capital Gains?
Remember, the house is still in dead husbands name and will only transfer after probate closes. We're also trying to both reduce back taxes and avoid letting the IRS put a lien on the house. The Aunt has tax problems but the house is currently not in her name.
My idea: Probate closes, Aunt quickly gets title and sells the house to us (my wife is her niece) well under the market value, say $40,000 cash to make the sale fast through escrow and does not involve financing. She pays off back taxes and we assume title. We refinance the house and pull out 80-100K. We pay back our 40K to ourselves and use the remainder to buy another house for Mother-In-Law and Aunt. We can gift up to $11,000 tax free ( I think ). We rent the house at $800+ and have a mortgage of $400-$500 a month. Result, we get a rental with positive cash flow and Aunt gets back taxes paid and Mother-In-Law and Aunt get to live in new home.
Question: Can you sell a house well under fair market value to avoid capital gains? Can a home owner sell a house for whatever offer is made? Can the buyer be a relative?
There are multiple issues going on here because of bad management. Being the only one that knows about investing and things like living trusts, where this could have been avoided, I am trying to think of solutions where I can help them pay off back taxes, take some money out of the house, keep the tax advantage of an investment property and create a positive cash flow. Is this doable?
Signed - Looking for advice from experience.
Look into a 1031 exchange see if that helps. Capitals gains put into property then taken out through home equity loan or refinance.
Some points to consider:
First, on the issue of how title could be transferred/deeded to you, you could order a preliminary title report and see how the title co. sees the current state of title, then you'd be able to counsel with the title co. lawyer to see what they'd require for the legal deed to you.
Second, just remember that nowadays, with the IRC using "stepped-up-basis", a RE property is re-valued, at death of owner, and takes on the new market value...so if then sold to you UNDER that value, you might be taxed on what the IRS considers its actual value received by you, minus what you actually pay.
Third, you can bet that any other heirs of aunt will be carefully looking at any deal she enters into with THEIR inheritance, and you're going to have to very carefully document, with witnesses, etc., any & all dealings with her.
This is true with any Sr. or person with known mental or emotional instability or problems.
I recently made a deal with a Sr in a Mobile Home Park wherein I agreed to help a woman in return for which she gave me a written option on the MH.
A couple of days later, I called her about something, and she told me she thought she had a buyer for the home.
I reminded her of the option agrement, and she said:
"Oh, I don't have any memory of that, as I am getting pretty forgetful !"
As I'd been in a big hurry, I had no witnesses or notary, so if push had come to shove, I'd probably have given her the agreement back or torn it up.