Rental property deficits pile up
By Benny Kass, Special to the Times
Published December 1, 2007
Q: We own 10 Florida rental properties: two condos and eight nice, single-family homes in good condition and in good locations. The rents do not cover our expenses. Our deficit is $9,500 a month. Should we dump them and lose all our down payment and equity, or should we borrow and hang on?
A: Why not sell one or two to reduce your debt service? You say you have equity, so this might generate some extra cash, even after paying capital gains tax.
If you have any properties that would generate a loss, consider selling them first, so you can take the appropriate tax loss when you file your income tax return next year.
Q: My 89-year-old aunt added my name to the deed to her home so it would not go to the state when she died. She never married and has no children. I have now been told that her name is no longer on the deed and apparently I am the sole owner. My aunt would like to move to an elder community and would qualify because she does not own her home. She has other nieces and nephews and would like the money split among us. What are the ramifications of the capital gains tax, which I will have to pay on a home that is free and clear and worth about $100,000? How long before all the taxes come due?
A: Your situation is exactly the reason I have been preaching for years that parents or aunts, in your case should not give their property away without first understanding all consequences.
I know many readers will argue that by doing so, the aunt now can qualify for certain types of housing - presumably paid for by the government - which otherwise would not be available to her. That may not necessarily be the case, and all I can say is that you and your aunt should have carefully reviewed all the tax and financial ramifications before she put you on the title.
Your aunt still may not qualify for the benefits she seeks if the house was transferred within the "lookback" period the government uses to determine eligibility for various government assistance programs. Depending on the laws in your aunt's state and when the house was transferred to you, she may still be considered to own a house, and thus may be ineligible for the benefits she seeks.
As for your income tax consequences, the tax basis of a person giving a gift becomes the tax basis of the recipient. So if your aunt purchased the property for $50,000 and added no improvements, her basis shifts to you. If you were to sell the house today for $100,000, you will have made a $50,000 profit. Let's ignore real estate commissions and other closing costs that will reduce your tax liability. In this example, you will have to pay the IRS 15 percent of your profit, or $7,500. You may also have to pay state income tax. This tax must be paid when you file your next income tax return.
Then, should you decide to honor your aunt's wishes to distribute the net sales proceeds to her other relatives, this will also be considered a gift by you. While you must pay no gift tax, there may be consequences for your estate upon your death. You can give away up to $1-million without tax consequences during your lifetime. The proceeds of this house sale will be counted against that $1-million.
Talk with a real estate tax lawyer as soon as possible. You want to be absolutely certain that your aunt has been removed from the title before you take any other action.
E-mail Benny Kass at firstname.lastname@example.org.