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Transfer ownership without tax bite?
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DEAR BENNY: If I buy a house outright for my aunt for $459,900 (fair market value), what is the best way for me to transfer ownership to her without tax consequences? I know that the gift tax exclusion is now $13,000. I’m not married and neither is my aunt.

I understand that you would probably recommend I have her sign 35 promissory notes of $13,000 each plus one for $4,900. Then just forgive each note annually for 36 years. However, I’d rather not drag it on for that long, if possible. I was thinking of doing it indirectly through 35 trustworthy people, like giving each of them a $13,000 share of the property that they can just regift to my aunt.

Would the best way be: (1) having 35 people sign promissory notes that I can immediately forgive, then having her sign a promissory note to each person that they can immediately forgive, or (2) somehow signing over a $13,000 share of the property to each person that they can just re-gift to my aunt? Do you have a better suggestion? --Ashley

I do not provide specific legal advice to my readers; I can give only general information and always urge my readers to consult with their own tax and legal advisers. You certainly are creative, but I suspect that the Internal Revenue Service (and possibly your state government) will consider this a scam designed to avoid either capital gains tax or gift tax, or both.

First, even if would fly legally, I cannot believe you can find 35 people who would be willing to stick their respective necks out for your scheme. And if you sign over any portion of your property, I suspect that you will have to pay a lot of recordation and transfer taxes to your local taxing authority.

Have you considered having your aunt buy the property with your guarantee to the lender? That’s one possible scenario. Another is to see if you can add your aunt to title, even though you will be the only person signing the promissory note to your lender.

Alternatively, can you afford to lend your aunt the money so that she can buy the house in her own name? She can sign a promissory note, secured by a deed of trust (called a mortgage in some areas), and you will be the lender.

Then you can gift her a portion of the property each year based on a percentage that does not exceed $13,000. And to avoid the situation where this has to go on for years, you can also include her as the beneficiary of your last will and testament.

I welcome other suggestions from my readers.

We heard that it’s a good idea to add your adult child to your deed so that at your death there will not be inheritance taxes/death taxes, etc. Can you discuss the pros and cons of adding our 18-year-old daughter to the deed to our house, including current tax implications as well as any upon our deaths? We still owe around $75,000 on the house. Would we have to add her as a responsible party on the mortgage as well? --Sandra

DEAR SANDRA: This is a very personal issue that only you and your husband can answer. However, I don’t think it’s a good idea for two important reasons.

First, you could be creating a tax problem for your daughter if she ever sells the home. This is somewhat complicated, but if you add your child to title, her tax basis is your basis. In general, tax basis is the amount you paid when you bought your house, plus any improvements that add value to your house.

Let’s say you bought the house for $100,000 and made no improvements. Your tax basis is $100,000, or $50,000 for you and the same for your husband. Let’s further assume that when your husband dies, the house is worth $200,000.

Although the stepped-up basis was repealed for year 2010, the new tax law that President Obama signed on Dec. 17, 2010, restores that concept beginning Jan. 1, 2011.

So, when your husband dies, you get the stepped-up basis. Your basis now becomes $150,000 (your original $50,000 plus your husband’s basis on the date of death).

Let’s further assume that when you die, the house is worth $400,000. Your daughter will now inherit the house, and her tax basis is the value of the property on the date of death, namely the $400,000. If she decides to sell at that price, she will have had no gain and thus will not have to pay any capital gains tax.

But if you add your daughter to title, the IRS will treat it as a gift. Let’s say you give her one-third of the house. You and your husband are still alive. Accordingly, her basis becomes $33,333 (i.e., one-third of your collective basis).

Yes, when both mother and father die, the stepped-up basis is available to her, but if you do the numbers, it will still be less than if she inherited the house.

Of course, if she buys in at a market price, that would increase her basis, but then both of you -- as sellers -- might have to pay some capital gains tax.

If you have owned and lived in the house for two out of the five years before you sell it to her (and you file a joint tax return) you may be eligible for the up-to-$500,000 exclusion of gain. But talk to your own tax adviser to confirm your particular situation.

DEAR BENNY: My husband and I have two kinds of loans on our house; the first is interest-only with a 6.25 percent interest rate and the loan amount is $286,000. It will be adjusted in five years, which will be sometime this coming spring.
The second loan carries an interest rate of 8.375 percent with a principal balance now of $151,603. We are paying $110 in principal and $1,061 in interest monthly. It has the same five-year adjustable-rate life and started the same time when we bought our house for $440,000.

Both of us have good credit. Is it possible for us to get a fixed 30-year loan with a lower interest rate combining the two loans? If so, when should we do this and what should we do?

By the way, when we bought the house, we did not have money for a down payment and that’s why we went to a loan broker to help us to get 100 percent financing. --Mary

DEAR MARY: Unfortunately, the days of 100 percent financing are just about gone. Most borrowers who obtained such loans are now underwater; their mortgage loan is greater than the value of their house. In fact, the 100 percent financing was one of the major catalysts of our current mortgage/foreclosure crisis.

Borrowers could not refinance because they had no equity in the home, and if they tried to sell, they would have to come up with the difference between the contract sales price and the outstanding loan balance.

Do you have equity in your home? If so, you may be able to refinance. Talk with several lenders, especially about getting an FHA mortgage. Often, such a mortgage carries a decent rate, and in many cases the lender will not require a lot of equity to be in the house.

Unfortunately, interest rates -- while still quite low (as of this writing still below 5 percent) -- are slowing creeping up.

Here’s a suggestion: Talk with the lender who holds your first mortgage. Explain your situation, and tell him/her that the monthly payments are too high and you don’t know how long you will be able to continue to pay them.

Ask the lender if you can arrange a loan modification, whereby the lender will give you a new first mortgage based on the combined values of your two existing loans, but at a rate that is considerably lower than what you are currently paying.

I can’t promise success, but it never hurts to ask.