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Daughter’s plan raises homestead exemption questions

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 nonowner 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.

Dear Benny: My wife and I rent a home owned equally by our two children as a result of a personal residence trust that gifted the house to them.

We may one day need to move into a retirement facility. One of our children lives in another distant state and has a family, so it would be most unlikely for him to occupy the home.

However, our other child lives in our city and could consider moving into the home for two years to receive the $250,000 exemption upon its future sale.

What is the impact on the child who will not be occupying the home? –Sam

Dear Sam: A personal residence trust, PRT, or a qualified personal residence trust, QPRT, is created for a term of years.

Generally, as long as the property is held in a PRT, the trust is the property owner, not the beneficiaries (in your case your two sons). However, because you state that you are paying rent, I have to assume that the term of the trust has expired, in which case your sons now own the property.

There is a potential tax problem with PRTs, namely, that the tax basis of the grantor (i.e., you) becomes the tax basis of your beneficiaries (i.e., your sons). So if your sons sell the house, they have to be concerned with tax issues. However, there is a tax break for homeowners, namely, that a certain portion of your profit can be excluded from capital gains tax.

If the homeowner has owned and lived in the house for two years out of the five years before it is sold, he/she can exclude up to $250,000 of any gain. If you are married, and your spouse has lived in the house for the same two-year period, you can exclude up to $500,000 of your gain.

Your son who will live in the house will be able to take this exclusion if he meets the “ownership” and “use” tests described above.

However, the son who will not live in the house will have to pay capital gains tax. And because his basis will be your tax basis, he may end up having to pay a large number to the IRS.

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 benny@inman.com.

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