Question: My parents have a 40-acre parcel of land along the coastline. They owe $150,000 on their loan. Of their six children, three may be interested in purchasing, as a partnership, the property for the amount our parents owe. Our parents would continue to live in their home. They are in their 70s and living on a fixed income, and it would cost between $250,000 and $300,000 for them to buy a new home in the community in which they live. When our parents are gone or can no longer live in their home, we would sell the property. Do you have any suggestions on how to set up a partnership? What are the pitfalls or advantages of such a partnership?

-- Delene, Colorado Springs, Colo.

Delene: I asked Dennis I. Belcher, a partner at the law firm of McGuireWoods LLP in Richmond, Va., for help on this complicated question. Mr. Belcher, a past chairman of the American Bar Association's Section on Real Property, Probate and Trust Law, wrote in an e-mail that your plan is "admirable" as an attempt to help your parents but "creates several issues that could be significant."

For one thing, Mr. Belcher writes, any siblings who don't take part in the purchase may feel cheated later. So he urges you to make sure that all siblings have the same opportunity to participate in the purchase. Those who decline should state that in writing so that there is a record of their decision.

Then there is the gift-tax question. "If the purchase price is less than the fair-market value (that is, the appraised value, not the assessed value for local real-estate tax purposes), the parents will be making a gift to the purchasing siblings," Mr. Belcher writes. "If the total of the gift portion of this transaction and previous gifts in excess of the gift-tax annual exclusion ($11,000 per donor or $22,000 if gift splitting is elected) exceed the gift-tax exemption ($1 million per donor or $2 million if gift splitting is elected), there will be gift taxes payable." A tax adviser may be able to help you minimize these taxes.

In addition, he says, an estate-tax issue arises because the parents will continue to reside in the property. "If an individual transfers property and retains the right to use or reside in the property after the transfer," Mr. Belcher writes, "the fair market value of the property will be included in the estate of the transferor upon the transferor's death. You cannot give an asset away and continue to use the asset.  If you do, the tax law treats the property as if you had not given away the property."

Under the circumstances you describe, he adds, the Internal Revenue Service might well include the entire property in the estate of the parents. That won't be a problem if the value of their assets isn't enough to generate an estate tax. The estate-tax exemption for people who die in 2004 is $1.5 million and will rise in stages to $3.5 million in 2009. 

If estate taxes may be due, Mr. Belcher recommends these alternatives:

• "The parents could have the tract surveyed and carve out the residence and several acres. The siblings would purchase the unimproved property. Because the parents would not continue to use the unimproved property, there should not be an estate-tax problem."

• "The parents could pay fair-rental value to the purchasing siblings for the use of the residence. But the IRS scrutinizes these types of transactions carefully and this approach is not risk free."

There is also an income-tax issue. "The parents will recognize capital-gains tax to the extent that the purchase price exceeds the parents' income-tax basis in the property. It may be possible to structure the transaction to take advantage of the personal-residence exclusion to eliminate or minimize this tax," Mr. Belcher writes.

While Mr. Belcher has provided general guidance, he recommends that you and your parents seek professional tax advice on any such transaction.

-- Mr. Hagerty is a staff reporter for The Wall Street Journal. His "House Talk" column appears most Fridays on RealEstateJournal.com. E-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question.

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