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Flipping a house with Dad


Possi

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My client called with this scenario:

Dad (85 years old) is getting a great deal on a house to flip. Client (son) is in construction (and files a Sch C). 

Dad wants to have son put on the deed but Dad will put all the money down on the house. Son will help fix it up by doing some work and orchestrating the work he can't do. 

Dad will split the gain on the sale with son when it sells. Dad will also pay son for the work as it's getting done. 

The work son does will be income on the Sch C. 

The sale will most likely be reported on 1099S's to both men. 

If the flipped house is investment property and lands on the Sch D, 50% on each of 2 returns, will Son's basis be 50% of Dad's investment, treating half the house as a gift to the son? 

OR, will Dad take his 50% of the sale against 100% of his invested money... and son has zero basis in the property, taking his 50% as full gain? 

OR, OR, ORRRRR, should Dad NOT put son on the deed and GIFT son and his wife with 50% of the gain? 

Let the games begin! I'm so happy to be here! 

 

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I like the last option, unless dad has lots of other income.   Keep the house.  Hire the son to do the work (SE income to son).   Pay the other subs directly (keep it out of the son's tax return and no need to 1099's).   Gift 50% of profit (less cap gain taxes paid) to the son and daughter in law after the sale.

If dad has substantial taxable income and son does not, then the dad should sell the house to the son (installment sale), who then sells, and then gift back 50% of the profits to the dad after clearing the installment note from the proceeds.

Just thinking out loud here.

Tom
Modesto, CA

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The reality is that the father is buying the house and hiring the son as a contractor to make the improvements.  Anything else complicates things and could lead to unforeseen consequences.    What is the reason frothe father putting son on title?  Is it because of age and the possibility he may not be around when the project is completed?  That cn certanly be handled differently.

Also, are the ongoing payments to the son in addition to the 50% the son will receive as his share of profits, or are they advance payments?

f dad dies before the project is completed, how will the rest be financed?  

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Dad is putting son on the deed because of Dad's age. I agree that there must be ways that son can inherit the house without his name being on the deed. It's causing a rat's nest of potential issues. 

The ongoing payments to the son will be for work done, Sch C income. 

If Dad dies before the project is completed, I have no idea what would happen. If son's name isn't on the deed, and there's no 1099S to come in son's name, I am not involved in that part of the circus.

I"m going to push for son to NOT be put on the deed, and let the gains be split as a GIFT to son, net of Dad's tax. Thanks so much for chiming in on this! 

 

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