Real Estate

Family Real Estate Transactions Need Independent Guidance

BY Richard Montgomery TIMEFebruary 24, 2022 PRINT

Dear Monty: I have two brothers, Bill and Jerry. Bill and Jerry purchased a property together in October 2016. Bill, with his wife, also bought a property in September 2019. Jerry and I are looking to buy a property together. We plan to sell Bill and Jerry’s property to buy this property.

Here are my questions: 1) Do we need to sell the property that Bill purchased in September 2019 before three years have elapsed? Bill purchased the second property for tax benefit purposes. 2) Let’s say the property Bill and Jerry own sells for $800,000. Suppose Jerry and I buy a property for $1,800,00 ($800,000 comes from Bill and Jerry’s property). How much do Bill and Jerry owe in terms of taxes?

Monty’s Answer: Thanks for reaching out with your tax questions. Unfortunately, I cannot answer your questions. The U.S. Tax Code is a complicated document, and you must answer many questions to reach a conclusion. Bill and Jerry will likely have different answers because the tax code bases taxes on each individual’s circumstances. Length of ownership is only one of many questions. It would be best to have a local certified public accountant (CPA) answer your questions as there would likely be state taxes to consider on a sale. That person will also need additional information.

This Arrangement Sounds Peculiar

You did not ask me for advice on the transaction you and Jerry contemplate. Still, I feel obligated to share my observations about the information you shared with me. A seasoned investor wouldn’t have asked me for the answers. It doesn’t feel like a transaction a sophisticated real estate investor would undertake. You state that a new property you and Jerry would buy is worth $1,800,00. I suspect you meant $1,800,000. Assuming that $1.8 million is correct, have you and Jerry agreed upon the percentage of ownership each of you would have? Are you going to match Jerry’s contribution to keep the ownership percentages equal at 50/50? Is the property Jerry and Bill own free and clear? Is that partnership a 50/50 deal? Jerry will get $400,000 of the sale proceeds if it is free and clear of a mortgage. You will need to come up with $400,000 of your own funds. And then, you and Jerry will still need to borrow $1 million unless you are putting up the million or some lesser amount in cash.

Consider Outside Guidance

The way you have described this venture raises the question in my mind as to whether you all have representation guiding you. As you described it in your question, the deal does not appear to be financially advantageous unless you were all on a winning lottery ticket. Assuming the investment Jerry and Bill made together is performing well, why would they sell it if only one of them is joining in the new venture? If they are selling because it isn’t performing well, is $800,000 realistic? If loans are being made between the three of you to make the new project work, those loans also have their tax consequences.

It simply doesn’t sound easy, even before you get to borrowing the million dollars.

Richard Montgomery is the author of “House Money: An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty or at DearMonty.com. Email him at monty@dearmonty.com.
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