Gift Rental Duplex to Son with a mortgage

[Qxflyer]

I searched the questions, but didn't see this particular situation. We own a rental duplex that we lived in 1 unit and then in 1990 converted entire duplex to a rental. For the last six years our son has rented 1 unit at FMV. My husband is 70 and no longer wants to hassel with owning a rental. We wanted to gift it to our son instead of selling it and paying the taxes. We have a mortgage of $215k that our credit union says we can refinance and add our son to the loan and the title.  Then in a couple years he could then refinance and take our names off of title and loan. Our son is not concerned with getting the house at our basis, which is now zero after being depreciated out from the purchase price of $39k, as he will be living in one unit as owner occupied. House is now appraised at $517k. So my question is this: If we do this, does us gifting son the house, (or would it be half the house on form 709, then the other half when we are off the loan and title) trigger any type of taxable event for us since there is a mortgage? We would rather do this than just waiting for him to inherit it.

[Critter]

Seek a local real estate attorney that has income tax knowledge so it is done properly as there may be state issues as well.  

But in short since you are not releasing the entire property at one time then you are doing only a partial gift at this time and will need to file a gift tax return now and again later. 

[TomYoung]

This is way, way too important and complicated situation to solicit advice from a message board.  Get yourself some COMPETENT local help, somebody that can asses your overall situation.

Generally gifting real property is a bad idea.  Your son may not be concerned with receiving gifted property with $0 basis but if he sells a few years down the road he will rue the day.  There may not be a direct "gift tax" situation here but without knowing details about your personal circumstances it's impossible to make an informed judgement. 

You might have your son manage the rental, (for an appropriate fee), and he may decide that he doesn't want the hassle with owning a rental either, but that means your husband doesn't have to deal with it anymore.  Or, there are professional property managers, too.  

I understand that gifting the property allows you to wash your hand of the rental hassle and seems like an easy way to solve the issue, but I'd bet there's a better approach. 

[Anonymous_]

I agree with @Critter; consult a local professional with income tax and estate planning experience.

One thing is for certain; you should not attempt to prepare Form 709 yourself, or at least not without professional guidance, as it is not a DIY project.

[Anonymous]

definitely get pro advice.  A problem i see is that if your son becomes part owner (since your and your husband's name remain on title,   a partnership return may be required.   which adds to not simplifies your situation.  failure to file partnership returns, if required, carries substantial penalties.   

[Qxflyer]

Thanks for all of the replies! Yes, I figured that I would probably have to seek professional advice... we would definitely need help filling out the 709 form for sure. I will look around for a Real Estate CPA and see what I can find out.