Dear Real Estate Adviser,
My aunt wants to sell her fully paid home to me and my husband. Is she legally obligated to sell at market value? I don’t want her to be forced to pay a lot of taxes if she sells for less. My husband and I have no intention of reselling. We plan to live in the house forever.
— L. Rivers
Your aunt can sell you the home for a penny if she wants. But as you suggest, a too-cheap sales price will attract the attention of the taxman. Lenders also tend to get a little hinkey about such transactions under some circumstances, though perhaps not this one.
But yes, a generous discount proffered on the house may subject your aunt to gift-tax laws. And if she offers you loan terms (known as “owner financing”) at interest rates below IRS guidelines, that, too, can be considered a gift.
On the other hand
But there’s good news: Your aunt probably won’t end up paying anything. As I noted on a different topic, such a gift must be reported on IRS Form 709 if it exceeds the annual individual $14,000 tax-free gifting limit. But unless she anticipates giving away total gifts of $5.43 million or more in her lifetime, including her willed estate, she won’t be on the hook for anything in your deal. (In California, however, such gifting may trigger a new property-tax assessment on the home, plus a transfer tax of $15 or so per $1,000 value.)
The FHA angle
If you’re getting an FHA loan to buy the house, you’ll be asked to fill out an “Identity of Interest” form asking for your relationship with the seller. Since this is not an arm’s-length sale between two strangers in which an owner is likely to sell at a fair market price, you’ll have to divulge that.
It’s a federal crime to lie about your relationship with the seller when you apply for an FHA loan. This is designed to dissuade the kin of distressed sellers from committing mortgage fraud as “straw buyers” who buy and then allow the seller to stay in the house at a smaller mortgage payment, often deeding that house back to that seller in an under-the-table arrangement.
Nothing lasts forever
By the way, you needn’t vow here that you’ll keep the place ad infinitum, though reassurances to your aunt that you’re not going to flip her place for a quick buck will no doubt hearten her.
Who’s to say how long your “forever” might be, anyway? Grandkids are born, neighborhoods change, people transfer jobs, or simply get old and can’t, or don’t want to maintain a house and yard. But if and when you do sell, you’ll have to pay capital gains tax on the difference between what you paid and what the IRS considers the home’s fair market sale value.
Do the due diligence
Despite the friendly nature of the deal, I strongly suggest you don’t skip the customary due-diligence steps. Try to approach this purchase as if you’re buying the home from an unfamiliar person. Though you don’t want to risk insulting your generous aunt, be sure all of the agreements you’ve arrived at with her, and any additional expectations, are clearly spelled out. At the very least, have a full title search done in the event there are outstanding liens or other judgments against the place. If there are, the “deal” you’re being offered may not be such a deal after all.
And again, unless you’re benefiting from owner financing, be sure to be straight with any lender about the nature of the transaction if asked.
It would probably be best if your aunt contracted an estate planner, financial planner or tax specialist to get the lowdown on the sale’s federal and state tax impact on her.
And in the meantime, be nice to Auntie! Good luck.
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