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 1 1/2 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.
Benny 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 email@example.com.