Expert: Dick Dennis - 7/23/2006

Question
Hi Dick:

Two years ago, my husband and I bought a condo in California 50/50 with my parents.  My husband and I now want to buy out my parents' equity  and own the property by ourselves.  I wondered if this would be required to be considered a "sale" of the property, both for IRS purposes and for real estate tax purposes.  The property has appreciated since its our original purchase.  Needless to say, it would be preferable for my parents to avoid recording a capital gain (since it's non-owner occupied, and since they have no interest in doing a 1031), and preferable for my husband and I not to have our real estate taxes re-assessed at the current market value.  

With receipt of the appropriate buyout money, could my parents just quitclaim their interest to us without recording a capital gain and without us having our taxes re-assessed?

Thanks for your thoughts!

Answer
You may handle the transfer of title anyway you want, Lisa, but one way or another you ARE going to pay for it. I presume you are going to pretend that your parents never had title in the condo rental. That's fine with them, but one day in the future you are going to either sell the condo or 1031 it. You basis is going to be, therefore, what paid two years ago, rather than the stepped up basis you would have had your parents declared their gain, that's if there is a gain in this market.

Further, here in California, the county has you and your parents as owners. The property tax bill they send you each year I presume has yours and your parents' names on it. One day in the future, you are going to transfer that property to another party and the county is going to see that your parents had nothing to do with the transfer. They MAY ask you how did your parents get off title.

Since this is more of a tax concern problem than a real estate problem. Therefore, I suggest you consult with a tax expert (tax attorney, CPA, etc.)

I do wish you well, Lisa.

Dick Dennis            dixiedee13@aol.com