So upon reading my prior post, I realize I was not very clear. Here is what I was planning: my parents add me to the title of the home (without removing their own names) and I pay the remaining mortgage payments on that home, while they collect the renters' payments. Effectively, on my resident salary of ~45K, I will have little to no taxable income because of the mortgage payment deductions. Does what you said above still apply if there is not an actual property "transfer" but more of a "sharing" that is occurring? If not, what are the disadvantages to this approach?
So if they put your name on the house (we're talking about the deed here, not the mortgage, we'll get to that later) you'll in essence own half the house (or 1/3 if they are both on it now). They will need to pay tax (its considered a gift) on half (or 1/3) the value of the house the year they add your name - that would be money you would have inherited in the future.
Also when they die, you just own the house. The estate will be less the amount of the house so this may save you estate tax over the exemption BUT you'll lose the step up in basis. In other words. They bought the house in 1999 for 400k. They die and now you're the only one on the deed now its worth 800k. You sell it...you owe capital gains on 400k (no exception since its not your primary residence). You could do a 1081 exchange but otherwise there's no way to get rid of that property tax free. What would happen if you had inherited it instead is you'd get the house valued at 800k at their death and that 800k would be your future basis for capital gains tax on a sale. In other words you could sell it for 800k and not owe ANY taxes.
Even if you know you're NOT going to sell it....depreciation on rental properties starts over on inheritance. If you have your name on the property like you want to do you're depreciating 400k-minus land over whatever is left in the 27 and a half years since they bought it. If you inherit it you get to depreciate 800k (just sticking with the same numbers) minus land for ANOTHER 27 1/2 years. This is HUGE for rental properties by the way.
Total that all up and you're likely over the amount you would have paid in estate tax on the additional value of the house in the estate.
In summary, It COULD make sense but the numbers almost always favor not doing this, thats why people don't do it.
This is an enlightening discussion, but for me it'll be the opposite for now. I will be entering a low income period (residency, max salary of 55K/yr) whereas my rents will be in a high income period.
Well then the income won't matter right now but maybe worth thinking about down the line depending on how long you're going to be intraining and how long you think they'll live. Not to be morbid but we had the "benefit" of a diagnosis and relatively accurate timeline for planning.
This is essentially what I wanted to do with my income. Have myself added to one of their homes titles and transfer my income to their mortgage payments on rental properties to dispose my income.
Now you're talking about something different here. Refinancing the mortgage (your name will have to be on it...the mortgage, not the deed to the house) is a different issue. You'll likely get a similar rate since rates are so low right now and I assume your parents have a good credit history but you're going to be paying out about a 5-8% fee to refinance with your name on it. If you don't refinance, your name cant be on the mortgage and the IRS isnt going to allow you to deduct the interest.
Also, you're talking about BIG red flags if you try to deduct interest on a huge mortgage with a small income esp if you take the depreciation on the property as well. The IRS is going to be wondering where that money is coming from.
If you have the benefit of a timeline. Get rid of cash by gifting, max amount every year 12k (might be 13 now, was 12 a few years ago) to as many people as you can...makes a nice christmass gift. Property in a trust with a pour over will if they are actively developing/turning over property (never a standard will). Take the step up in basis and start the deductions over. Anything you want to sell later do a 1031 exchange to a like property in an area you want to live in, rent it for a year. "Live" in it for 2 then sell it and save yourself any capital gains by claiming it as your primary residence.
If they're really worth a fair amount (again >10 million or so) then look into incorporating the family. This will save you a ton. You can gift and leave members of the "corporation" fractions of interest that you can really undervalue since nobody on the free market would be interested in buying a fractional value of your family trust. In other words. Whats really worth a 10k fraction of your company would only sell for 7k on the free market because it would be impossible for anyone outside the family to do anything with a 1% stake. To you, you just received 20k of family money, but to the gov you got an official 14k of value and only need to pay gift tax on 1k.
in conclusion. If your family has a lot of money get a lawyer, they're worth it.