DEAR BENNY: My wife and I are in our mid-50s. We have a 30-year-old daughter who owned a house years ago and now resides in an apartment. Our son is 21 and also lives in an apartment. We want to put our home in which we have lived for 15 years in the kids’ names. We have approximately three years left on the mortgage.
Our questions: (1) Would they also go on the mortgage or just the deed?
(2) If our son is on the mortgage or the deed, will this jeopardize his opportunity to qualify as a first-time homebuyer?
(3) How do we go about this process? Attorney? Realtor? Mortgage company?
(4) Would this make it difficult to get a home equity loan by me or my wife? —Jack
DEAR JACK: Let me start by saying at the outset that I do not believe putting your kids on title is a good idea.
There are a number of reasons why I oppose your plan. First and foremost, while you trust your children, you have to take care of yourself first. I don’t know your financial situation, but you don’t want to end up 10 or 15 years from now without a house and with little or no income for retirement.
I am not sure whether you want to give the entire house to your two children or just add their names to the title with you. But either way, this will significantly diminish your opportunity to pull out the equity you have in your house if and when you need it down the road.
For example, while I am a reluctant advocate of reverse mortgages, you may find that you want to take advantage of this kind of loan after you turn 62, but your plan will prohibit this.
From a tax point of view, it is also not a good idea. If you give property to your children, your tax basis becomes theirs.
For example, if you bought the house years ago for $50,000 and made no improvements, your tax basis is $50,000. If you give the house to your children, their basis is the same.
However, if the house is now worth $500,000, and your children sell without living in the property for at least two years, they will have to pay capital gains tax on the profit. Currently, the federal tax rate is 15 percent, plus any applicable state and local tax. And there is talk that the rate may go up to 20 percent in 2013.
But, if you leave the house to your children in your last will and testament, on the death of both you and your wife, your children will take advantage of what is known as the “stepped up” basis.
Let’s give this example: You and your wife bought the property for $50,000, and for this discussion I will ignore any improvements. The tax basis for both you and your wife is $25,000 each.
You have died, and now your wife dies when the property is worth $500,000. The tax basis for your two children who will inherit the house is $500,000. If they sell it for that amount, they will have no gain, and no tax to pay.
Here’s a suggestion: Somehow pay off the mortgage if you can, and sell the house to your two children at fair market value, less the cost of a real estate commission.
You take back 100 percent financing. You rent the house from your kids, and you pay them monthly rent and in exchange they pay you a monthly mortgage.
You can adjust the length of the mortgage loan so that the rent will equal the mortgage payment.
Since you have owned and lived in the house for two out of the five years before you sell it, and you and your wife file a joint tax return, you can exclude up to $500,000 of any gain. So, in most cases, you will not have to pay any capital gains tax.
If you still want to pursue your plan, you need a real estate attorney who also understands tax issues. You do not need a real estate agent.
KASS is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to email@example.com.