DEAR BENNY: I am retired and helping my son buy his first home. My credit is good, but his is not, so the mortgage is in my name. We found a fixer-upper for $80,000. I put $40,000 down and financed $40,000 for 10 years at 3.75 percent, and paid one and half points. My son will live in the house and make the payments of $500 per month.
The deed will be in my name as explained to me, but after it is recorded can I add my son’s name to the deed? After he pays the mortgage in full, I want to sell or transfer the house to him and have my name removed. What is the best way to accomplish this? --Anessa
DEAR ANESSA: I get this question many, many times, and there is no easy answer. Generally speaking, I do not believe it makes good financial sense for anyone to put a relative (or anyone else for that matter) on title. The law treats this as a gift, and the tax basis of the giver (giftor) becomes the tax basis of the giftee.
What does this mean? Your tax basis is $80,000 (i.e., what you paid for it). Let’s ignore any improvements you may have made. If you put your son on title for half of the property, his basis would be $40,000.
We all hope that property values will increase over the years. So if he were lucky down the road and decided to sell for, say, $180,000 (while you are still alive), you both would have made a profit of $100,000. You would have to pay capital gains tax on $50,000. Your son, if he has owned and lived in the property for two out of the three years before the sale, can exclude up to $250,000 of his gain.
But let’s say that he moved out. When the property is sold, he (and you) would have to pay capital gains tax, which today is 15 percent federal, plus any applicable state or local tax.
I have two alternative solutions: (1) let him slowly buy you out. The purchase price would be his tax basis. However, you would have to pay capital gains tax; (2) prepare a will and let him inherit the house. He would get the stepped-up value of the house on the date of your death, and should he sell it -- even if he has moved out -- his profit would be based on the difference between the sales price and his stepped-up basis.
However, if he remains in the house and can take advantage of the exclusion of gain discussed above, then there may be merit to gifting him the house now.
But, I can provide only general information. As always, readers should consult their own tax and legal advisers for specific answers to their questions.
DEAR BENNY: About two years ago I got a reverse mortgage on my house. After all upfront expenses, I got a lump sum payout of $98,000, which I used to pay off a loan on another property. Since then, my house has lost value. According to Zillow, my house is now valued at $93,000. In the meantime, the mortgage balance owed to the lender is $105,000.
As I understand, if I die tomorrow, my heirs have two choices. If they want to keep the house, they will have to pay the mortgage balance of $105,000, or they can sell the house and give the proceeds to the lender. The proceeds would likely be less than $93,000. Am I correct?
Another option: What if I decide I want to continue to live in the house and just send the lender $93,000? --Jim
DEAR JIM: Yes, you are correct as to the two alternatives that your heirs have. Although I still maintain that a reverse mortgage is not for everyone, one of the advantages is that the lender takes the risk that the house may go down in value.
But nice try on the second option! Why should your lender accept $93,000 and let you live in the house? The lender gave you $98,000, and clearly expects you to honor the terms and conditions of the mortgage documents.
Let me ask you a question: If the house increased in value over and above what the outstanding mortgage was, would you give the lender the higher amount? I doubt it.
DEAR BENNY: After my dad died last year, my mom sold their house. During the title search, however, she was surprised to learn that she didn’t even own the house! Apparently my dad had been convinced by a lawyer many years ago to change the title of the house, putting us three kids on it, and taking himself and mom off of it, but with the “right” to stay there indefinitely.
She obviously would have had to sign that as well, but had no idea what she was signing. So, at closing, each of us kids had to sign off on the sale, which I assume means that we will get some tax statement at the end of this year showing a third of the proceeds coming to each of us. As part of the sale, we also all signed statements that we were turning over the proceeds directly to Mom.
How was it even possible for a lawyer and my dad to put our names on the title without our knowledge or consent? Can you legally just put anyone you want on the title of your house?
What tax consequences might this incur for us kids -- that we received money from the sale and that we turned it over to mom? The house sold for only about $10,000 over the purchase price of 15 years ago, plus they had recently put on a new roof, siding and windows, so there would have been very little if any real profit. --Doug
DEAR DOUG: The answer to your first question really depends on the laws in your state. For example, in Washington, D.C., where I practice law, both grantor and grantee must sign a transfer and recordation tax form. Thus, in D.C., you and your siblings would have to sign something before the deed putting you on title could be recorded.
But in Maryland (where I also practice) there is no requirement that both parties sign, so your father -- in Maryland -- could have put you all on title without your knowledge.
As for the second question regarding any tax consequences, you really should consult an accountant for specific answers. Generally speaking, however, you have to determine the tax basis of the property on the date that your mother died. Furthermore, her basis would have been increased when your dad died.
This is because of a tax provision called the “stepped-up” basis. Oversimplified, the basis for tax purposes is the value of the property on the date of a property owner’s death.
Basis is important. To determine whether there is any profit, you take the basis, then add any major improvement to get the “adjusted basis.” Then you take the sales price and deduct such items as real estate commissions and closing costs to get the adjusted sales price. The difference between the adjusted basis and the adjusted sales price is your gain (or loss).
If the house sold for only $10,000 over the original sales price, I seriously doubt that there will be any profit, but your tax accountant must give you this answer.
However, there is yet another tax issue: You and your siblings gave the proceeds to your mother. That is a gift. You have no tax consequences if the gift does not exceed $13,000 (to any one person) in any one year. NOTE: You can gift $13,000 to many people in one year with no tax implications.
But if the gift is more than $13,000, you will have to file a gift tax return, which your accountant can do.
Since your mother presumably had a life estate in the property (that has to be formally determined), it could be argued that you did not give her a gift, but rather paid her for her share of her life estate.
These are complicated tax questions that must be answered by your own professional tax and financial advisers, especially if the amount in question is large. I can provide only some basic guidance.