Avoiding gift and capital gains tax Tax Talk by George Saenz • Bankrate.com

Dear Tax Talk,
My parents want to help us buy a larger home by selling one of their rental properties and "giving" us part of the proceeds for a down payment on a home in Southern California. They own three homes in the San Francisco Bay Area.

The house in question is not their primary residence and is worth approximately $850,000 with a $250,000 mortgage remaining. It was purchased two years ago for $650,000 as a 1031 "like-kind" transfer with the original property selling for $450,000, and it had a $100,000 mortgage remaining at that time.

I've been scouring your advice columns on how to avoid any capital gains taxes, gift taxes, etc. I see a lot about "unified gift" and "lifetime gift amounts." In the end, I don't see a way for my parents to avoid paying the 15 percent capital gains tax if they sell it and no way for us to avoid the same if they gift the house to us and have us sell it. Am I missing something? Any advice would be greatly appreciated.
-- Townson

Dear Townson,
Well, you're on the right track -- you have to pay taxes when you sell property at a gain and don't reinvest in productive property. Whether your parents sell or they gift to you and you sell, the consequences are the same: 15 percent tax is due on the gain.

Gift taxes might not be owed because of the large exemption, but that doesn't change the income tax consequences. You can reduce the tax if you or your parents have other investments that, if sold, would result in a loss: for example, stocks that have declined in value or a capital loss carryover from prior years.

The only way to avoid tax would be for your parents to borrow on the property. Borrowing, of course, is not taxable. The interest they pay would not be deductible, as it was given to you as a gift. Depending on the income generated from the property and its prospects for continued appreciation, borrowing may be the best solution when all things are considered.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.