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Avoid tax bite while saving brothers house
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DEAR BENNY: My brother bought his home about 15 years ago. He holds title only in his name, as a “single man.” He lost his job a couple of years ago. He is older and is having a difficult time getting rehired. Long story short: He is now in arrears (18 months), owes escrow for taxes and insurance payments, and is facing foreclosure. His lack of employment is presenting a problem getting loan modifications or refinancing.

I am in a position to help him by paying up all his arrears and escrows. I can then handle all future payments. His mortgage balance is approximately half the current value of the house, so the idea would be that we both become half-owners. Even though the loan will continue to be in his name (I cannot get a new loan), he wants to deed half the property to me, and show us as tenants in common.

I understand he can quitclaim to himself and me as tenants in common, but here is the wrinkle: He married about five years ago, and his wife is not on the loan or the title. Would my brother quitclaim as the current title describes him (single man) or would he have to describe himself as “married man”? And does his wife have to sign as well? --Jorge

DEAR JORGE: You are a good brother and I applaud your concern for your family. However, there are a couple of hurdles you have to overcome. First, I am sure that your mortgage (called “deed of trust” in many states) contains what is known as a “due on sale” clause. This is designed to protect a lender and stop someone with a very low interest rate from selling the property to a third party, who will assume that low-interest-rate loan.

There are a number of exceptions to the “due on sale” clause, such as a transfer between husband and wife, or a transfer to a relative on the death of an owner. (For a full list of exceptions, see U.S. Code Section 12-1701j-3.)

Unfortunately, there is no exception for a transfer from brother to brother. So you have two alternatives: Either do the transfer and take the risk that the lender will call the loan due, or -- better yet -- contact the lender and get its permission. While I cannot guarantee success, I suspect that the lender would prefer your arrangement rather than having to foreclose.

The second hurdle deals with the gift tax. If your brother just gifts you half of the house, and since I assume that the value of that half is more than $13,000 (the maximum a person can give on a yearly basis tax free) then he will have to file a gift tax return. (Note: If you happen to be married, and your wife will own the half with you, he can gift up to $26,000 yearly, but this still will not solve the problem.)

Your brother will not have to pay any tax, but there may be long-range consequences. Talk to a tax adviser about your specific situation.

A third complication: If your brother gifts you half of the house, your tax basis is his. Let’s say he bought the house for $100,000 and made no improvements. His tax basis is $100,000. If he gifts you have of the house, his basis (and yours) is $50,000 each. When you go to sell the house, since you will not have lived in it for two out of the five years before sale, you will probably have to pay capital gains tax.

My suggestion: Instead of getting half the house as a gift, can you arrange to buy the whole house? This way, your brother has some money, and your tax basis will be the purchase price you paid.

To answer your specific question: Different states have different requirements as to how title should be listed. You will need an attorney to discuss all of these issues, so ask your lawyer how your brother’s title should be listed.

DEAR BENNY: My son is a physical therapist who works on assignments in other states. He uses my address as his permanent tax home. I have never charged him rent in the past because he spends so little time here each year, but due to IRS ruling 73-529 I believe he should pay me $300 per month to duplicate living expenses while on assignments to continue receiving maximum weekly payments for living expenses from his employer.

Now my question: Can I return this rent money to him each year as a gift and be able to shelter both myself and son from taxes due? My son needs this money to survive in these difficult times. --Bruce

DEAR BRUCE: I am not familiar with the Internal Revenue Service ruling you referenced in your question, so you should consult a tax expert on that issue.

But every taxpayer has the right to gift individuals up to $13,000 per year, with no tax consequences to either the gift giver or the gift receiver. In fact, if you are married, you and your spouse can each give $13,000 to your son.

And if your son is married with children, you can give each of them $13,000, with no tax consequences.

DEAR BENNY: I was reorganizing my garage when I found a box of family memorabilia. In it was a deed for four burial lots that were purchased by my parents in 1950 in the cemetery close to where they lived at the time (Pennsylvania). My parents moved the whole family to California in the early 1960s and all, except me, are buried in California. I am the last living member of the family.

Can you please advise me as to the best way to sell this property? How do I find out what it is worth? Is it possible that the cemetery director would sell the property for me? Are there any charges for this sale that I may need to know about? --Maggie

DEAR MAGGIE: I would first find out if the cemetery is still operational. Do a quick website search and confirm that. If the cemetery is operational, I would contact the manager of the cemetery and ask him/her your question. I have absolutely no idea what the lots are worth, but again, their website may give you guidance.

Alternatively, you may want to contact a local church in this Pennsylvania town and see if they are interested in taking the lots off your hand. You can donate the lots to the church and take a charitable contribution on your next tax return.

But you will need to know what those lots are worth, and you should consult a tax adviser to give you specific advice.

DEAR BENNY: My daughter wants to buy me a home. I know I am very lucky. However, my understanding is that she will not be able to claim the homestead exemption in my state (which is $75,000.) She and her husband live in their home in which they claim their homestead exemption. I am not financially dependent on them; I just cannot afford to purchase a home. I can take care of the miscellaneous home expenses. As a non-owner of the home, how can the homestead exemption be applicable? --Patty

DEAR PATTY: This has to be a general response, as I am not familiar with the real estate laws in your state. But here is one suggestion: Talk to your local taxing authorities that administer the homestead exemption. If, for example, you have a partial ownership of the property, will you be able to take advantage of the homestead exemption? In other words, what is the minimum percentage of ownership required to get the exemption?

Then, depending on the answer, see if your daughter’s lender will allow you to be on title with her, in the percentage necessary for the exemption. For example, if 25 percent will meet the requirements, can you be on title with your daughter -- as tenants in common -- 75 percent to her and 25 percent to you?

Note that I suggested that title be held as tenants in common. While I would prefer that title be held as joint tenants, to my knowledge, very few U.S. states allow different percentages when title is held as joint tenants with rights of survivorship.

Why do I prefer the joint-tenant arrangement? If title is held as tenants in common, on your death your ownership interest does not automatically transfer to your daughter. It may have to be probated, and your last will and testament (which you should have in any event) will control who will get your share. With joint tenants with rights of survivorship, on your death, title will automatically transfer to the surviving joint tenant, and no probate is required.