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Avoid FHA financing restriction on intrafamily purchase

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POSTED November 21, 2012 11:08 p.m.

DEAR BENNY: I am currently trying to purchase a home from my daughter. The loan was approved, but the lender told me there is a law that if you purchase a home from a family member, they can finance only 85 percent of the sales price. Is this true? --Roger

DEAR ROGER: I was not aware of this so I contacted Craig Strent, from Apex Mortgage in the Washington, D.C., metropolitan area. He confirmed that FHA has such a guideline. The only exception is if you have been a tenant in the property and have been so for at least the previous six months.

Why not move in and rent the house from your daughter for six months? Interest rates are currently very low. While I doubt rates will go up soon, no one can predict where rates will be in six months. You have to make a business judgment whether you will be better off just taking the 85 percent loan (if you can come up with the difference) instead of waiting the six months.

DEAR BENNY: I put my estate in a trust. I would like to make sure that I understand everything correctly. I am leaving my house in the trust to my son. I was told that when I die the trust prevents probate. I want to make sure that when I go my son will just have to go to the courthouse and have the house moved out of my name into his with out any cost to him or having him to go through probate. Am I right about this? --Tim

DEAR TIM: If the terms of the trust specifically provide that your son will receive the house on your death, AND you make sure to put the house in title in the name of the trust, no probate will be necessary.

I do want to correct three of your comments. First, you asked whether the trust “prevents” probate. I would prefer to say that a properly created trust avoids probate.

But, please note that I said “a properly created trust.” Just because you have spent the time and money to create a trust does not automatically mean that probate will not be necessary. Many people do not understand that you have to make sure that after you have a trust, you have to put the property into the trust; that means that you have to have a deed prepared and recorded from your name to the name of the trustee of the trust. A trust cannot hold property; only a trustee of the trust can do this.

So, in our example, if you have other assets (a car, a pension fund, etc.) and they are not put into the trust, probate will still be necessary for those other assets.

Second, you asked whether your son could get the deed into his name without charge. There will be some governmental transfer and/or recordation charges that the county/city will impose in order to record the deed. They should be fairly nominal.

Third, you said that the property would be “moved out of your name.” Actually, that’s not correct; the property will be moved out of your name when you transfer it to the trust.

I suggest you contact a local attorney to guide you through the process.

DEAR BENNY: I recently heard that the portion of one’s monthly condo fees that go into a reserve fund for capital improvements to the overall property can be added to an individual condo unit’s tax basis. Is this true?

We don’t get detailed monthly bills from our association (most of us have our fees directly debited each month; the rest get undetailed vouchers to send with the money), but it is my understanding that the individual fees are based on our ownership percentage of the annual budget amount, which has a separate line item for the capital reserve fund replenishment.

Can we add that portion of our fees to our basis when we sell? This could actually make a difference for long-term single owners here, who could well exceed the $250,000 exclusion of gain depending on what market they sell into. --Abby

DEAR ABBY: Good question, so bear with me for a long response. Bottom line: There are some expenses that can be beneficial to you when you sell your condominium unit.

We need to start with some basic definitions: (1) gain -- also known as profit; this is the amount realized minus the adjusted basis of the home; (2) amount realized -- the selling price of your home minus your selling expenses; (3) basis -- this is the cost of your home, plus certain settlement expenses; (4) adjusted basis -- this is your basis increased or decreased by certain amounts. For example, if you have made major improvements to the house, the amount of those improvements increase your basis.

And clearly, in order to reduce your gain (and thus pay less capital gains tax) you want to legitimately increase both your basis and your selling expenses.

In a community association, each owner owns a percentage interest in the association. Your percentage interest can usually be found at the end of one of your legal documents, and is the number used to determine how much your annual assessment will be, as well as what percentage you have for voting purposes.

Over the years, your community association may have spent a considerable amount of money improving the property. They may have added a new roof to the community social room, put in a swimming pool, upgraded the “tot-lot” and made other similar improvements.

Let’s assume that the association spent $500,000 in improvements from the time you bought your property and that your percentage interest is 1.5. If you multiply your percentage interest by the total improvements, you get $7,500, and this amount can properly be added to your basis.

Now, this may be academic for those who are eligible to claim the up-to-$500,000 (or $250,000) exclusion of gain. However, many homeowners have been fortunate to have made a lot of profit on their home over the years, and clearly every penny saved is welcomed.

Furthermore, many older homeowners took advantage of the old rollover (which was abolished back in 1997), and their newly purchased homes carried the basis of their older homes. This is confusing. If any of my readers bought their homes before 1997 and used the rollover, please see your tax accountant to assist you in determining your basis.

For more information, get a copy of IRS Publication 523, entitled “Selling Your Home”. It is available free of charge online at www.irs.gov/publications.

DEAR BENNY: My mother just passed away (three daughters survive) and her condo is titled in the name of her living trust. One sister wants to purchase the condo. How should the sale be handled? Does the trust need its own tax ID? --Alma

DEAR ALMA: Your mother is called the “settlor” of the revocable living trust. Once the settlor dies, the trust becomes irrevocable and is a new tax entity, which requires a separate tax identification.

What instructions are in the trust document? The trustees must adhere to the wishes of the settlor who created the trust. Assuming that the sister has the right to purchase the condo (or if all of the named beneficiaries in the trust agree), the trustees of the trust will transfer title to the purchasing sister.

I do strongly recommend that you consult your own tax and legal advisers on this issue.

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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