Heed taxes when passing home to offspring

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Dear Real Estate Adviser,
I’ve heard there are benefits to selling or giving a home to your children. We are both 73 and considering downsizing and have only limited Social Security income. Our home is valued at $200,000. Is there a smart way to do this and create a win-win situation?
— Norv

Dear Norv,
There are several strategic ways to accomplish this, and I’ll be glad to summarize the most common. But first, let me compel you (after you read this) to consult an experienced tax adviser who can help you shape a plan that best meets your financial circumstances. This is a big decision with potentially serious tax consequences for you and all else involved.

You can transfer your title outright to a child or children, but then they take on an obligation to repay the loan to you. You’ll also need to heed the Internal Revenue Service’s specific rules on what constitutes an “arm’s length” transaction, which is a price charged by one related party to another that must be market rate, or roughly the same as if the two parties were not related. A new appraisal can help you validate pricing claims. A minimum interest rate would also have to apply in your calculations (see IRS Revised Rule 2010-24).

Some people in your situation sell their house to the kids through a private owner-financed sale for what appears to be fair market value, but then have them pay only a handful of monthly mortgage payments before they forgive the note. But realize that such transactions among family members are apt to invite extra tax scrutiny after that “forgiveness” occurs. House transfers, in particular, are often viewed by the IRS simply as gifts that were always part of a plan to avoid gift taxes from the get-go.

You could also file a quitclaim deed, essentially stating that you no longer stake a claim to the house and want to transfer it to someone — your child — who does stake a claim. The child would then be responsible for all taxes, liens, insurance and anything else that comes with the house. But careful! This also leaves the child susceptible to a whopping capital gains tax when he or she finally sells the place.

If you make the child a joint owner, which can also be done at the local county clerk’s office, it does relieve some of that tax burden on the child. You would have to specify what percentage each person will own. Remember, you don’t want to incur any added tax liability in your situation.

Make sure you get all agreements in writing with your children to clear up any potential misunderstandings. And be warned that such all-in-the-family deals seem to generate an inordinate amount of hard feelings and sibling rivalries. One more point: In most cases, the children should be given power of attorney so they can execute ownership of the property when you pass away (years and years from now, of course).

Now that you’re forearmed with a few ideas, don’t forget to make that call to the tax adviser. Good luck and happy retirement!

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