[USER]

My retired parents purchased a duplex in 1985 for $111,000, which is now valued at $1 million – ish.

My wife and I wish to purchase this property from them as our first home.

The property is located in California.

To enable my parents to avoid capital gains tax and prevent a reassessment of property tax, we are considering the following steps:

1. My parents refinance the property, with my wife and I co-signing since their current income is insufficient to access the desired amount of equity.

2. My parents pull out the equity, thereby avoiding capital gains tax.

3. My wife and I refinance to remove my parents from the mortgage (I am uncertain about the feasibility and process of this step).

4. A Claim for Reassessment Exclusion is filed within three years of the transfer.

5: A quitclaim deed is filed
In this situation do we avoid paying a down payment?

Is there a better way of purchasing this from my parents?

I would appreciate any guidance or advice on this proposed plan, particularly regarding the third step.

Edit: We live in California

[Shane]

I think your understanding is wrong on step 2……

They’re still going to have the capital gain….

Their best bet would be to will it to you and you inherit on their death getting a step up in basis.

[Justin]

Have them set up a trust with you as the beneficiary. You will take ownership with stepped up basis upon their passing, so it’s like you buying it for the current value, and if you decide to sell it a few years later, then you are only taxed on the difference between that current value and whatever it’s sold for.

But you need to consult a lawyer & CPA.

[Ann]

I think if they quit claim the Calif home to you, you get their original cost basis ($110k).

Then when you sell it you take the capital gains.

I think their quit claim to you is a gift to you, so they fill out the IRS gift tax form (this should be no problem…

they can gift you $13M/ea). With the quit claim won’t you trigger a new prop tax assessment.

Make sure under Prop 19 you, as the kids, get to keep their low property taxes.

If you inherit the home, you, as the kids, do get to keep their low taxes…

that is if you live in the home. You probably want to avoid paying property taxes on a $1M property (Calif Prop 19).

We did something similar in Calif…to avoid Prop 19 taxes.

We did this w/ a real estate attorney right after Prop 19 was passed but before it went into effect.

Now, kids can’t avoid a prop tax reassessment unless they actually live in the inherited home. We just inherited my dad’s home.

Since none of the 3 kids live in it and we rent it…

we pay taxes on a $1M home value. My mother gifted us her Calif home but we have her orig cost basis, $60K (b/c we did this before Prop 19 took effect).

I think there are things you can do to get your cost basis up if they quit claim the home to you…

like if you own the home, you can sell it to your wife and step up the basis.

Who is to say you aren’t getting a divorce and selling the condo to your wife…

but, you’ll want that stepped up cost basis when you sell the condo.

Do you get $500K of home gain that can be rolled into one’s next home????

What if you just buy the home from your parents in a private deal.

Just pay them every month.

Have their trust say that when they die you inherit the home.

When you inherit the home, you get the stepped up cost basis and the low prop taxes if you live in the condo.

Let us know what you did…curious…as I live in Calif and inherited two Calif properties (along w/ my 2 brothers).

[David]

How much is owed on the property currently?
How much cash do your parents need up front at a minimum?

What do they plan to do with the cash proceeds if they were to take a large cash-out sum up front all at once?

I am asking these questions because depending on the answers, I may have a couple of suggestions for you.

[Brian]

Every state is different in how they treat property taxes and transfers from parent to child.

Without knowing the state, no one will be able to help.

But I can assure you your plan will not work as it does not actually transfer the property.

Mortgage and title to the property are two completely different things.

The end goal needs to be you having the property and the mortgage solely in you and your wife’s names.

[Drew]

I don’t think you’re gonna be able to avoid the CA reassessment unless they pass away and you certify it as your primary residence at that point.

But definitely consult a real estate attorney.

[Amar]

Best thing is to let them own it and give it to you when they die and get the step up basis otherwise there is no way around it, Uncle Sam will get paid

[Scott]

I am not a lawyer nor do I play one on TV…but if that worked everyone would do it and we’d all know about it by now.

The couple things that might help (a) documenting all the property improvements they made over the last 39 years…

that will add to the cost basis and lower the gain and (b) if they will sell at market (to you or someone else) delay the sale to 2025 when they can start to plan now to keep their income very low (thereby having as much as possible of the gain in the 0% LTCG bracket).

[Jeannette]

One of you, your parents or yourself and wife, will need to take the capital gains.

You just need to decide who.

No way I am aware of for you all to avoid the tax.

[Elena]

I would recommend talking to an estate planning attorney. If you make a mistake in this transaction, it will cost you a lot more than a price of a consultation.

As I understand, if your parents leave you this house in a trust for you to inherit it upon their death, you will get a stepped up basis and nobody will have to pay taxes on the increased equity.

But you should really talk to an estate planning attorney in your state.

[Fatima]

Just quit claim you to the title. Then you’ll have to work out the finances.

Make the loan payments to them? Let them do a refi?

Or put it in a trust and and borrow against the trust?

[Audrey]

They’ll need to add you to titke to refinance a d pull out the loan.

You’re refinance of their loan will pay off their obligation and could even trigger ordinary tax and not cap gain because it’s relieving them of a debt obligation.

[Author]

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