DEAR BENNY: Our son is looking to buy a house and we promised to help him with the down payment, or part thereof, of approximately $100,000. What is the best way to do that to avoid any gift taxes? Can we give him the money as part of his future inheritance, which won’t be taxable up to a certain amount? Or can we give him the money and ask for a promissory note, and then my husband and I both can "give" him $12,000 yearly until the note is paid off?
He also plans to get married in the very near future. If he does and then later gets divorced, how can he make sure that that portion of the house plus appreciation will be solely his? –Margareta
DEAR MARGARETA: As of Jan. 1, 2009, you can give up to $13,000 to your son (or anyone) and it will have absolutely no tax consequences for either party. In fact, you and your husband can give up to $26,000.
But that amount will not be enough to help him buy that house. I don’t like the idea of calling the money his future inheritance. I suspect that the IRS would still call it a gift. For more information about gifts and the gift tax, go to the IRS Web site and type in "gift tax" in the search box.
I would recommend that you consider lending him the money. He will sign a promissory note as well as a deed of trust (the mortgage document), and the latter must be recorded among the land records where the property is located. If the trust is recorded, he will be able to deduct the interest that he pays you.
As for the amount of the interest, there is a concept called the "applicable federal rate," or AFR. Once again, you can get this information from the IRS Web site. These rates will tell you what the minimum rate should be.
However, your son will have to tell his lender that you plan to lend him some money. Many lenders may object, unless there will be sufficient equity in the property after adding in both the first loan and your loan.
If the lender objects, then you may just have to make him a gift of the full amount.
How does your son protect himself in the event of a divorce down the road? That’s a difficult question to answer. He can take the house in his own name, but a divorce court may award the wife a portion of the house anyway — depending on how long they were married. Your son can also enter into a prenuptial agreement with his future wife — but that often is not easily accepted by young couples in love.
I suggest you discuss the matter with your financial advisors (and your attorney) before you commit yourself to giving/lending any money to your son.
DEAR BENNY: Nearing the age of 71, I am feeling the need to downsize from a large home to a more senior-friendly house. But not wanting to lose $100,000-$150,000 dollars has inspired me to come up with a plan (my cost basis is around $320,000). I would deed over my home to my grandson (he is 22 and still in college). He will move from home and assume ownership and complete responsibility for it. No sale, no loss. Here is the second part of the plan: I will build a small house on a lot directly across the street from my present home. My daughter owns that lot with no mortgage, and she will inherit that home to rent or sell in the future. How should that second home be deeded to protect both of us? She needs to be protected from unnecessary taxes, and I need to be assured of a home for as long as I need it. –Barbara
DEAR BARBARA: Yes, the real estate market still has not perked up, and many people have lost a lot of value in their principal residence. I can understand why you are trying to devise a "win-win" plan.
First, let’s talk about your grandson. You have not told me what the value of the house is. If your tax basis is $320,000, then when you give the house to him, that will be his basis. The basis of the gift giver becomes the basis of the recipient.
So unless he lives and owns the house for at least two out of the five years before it is sold, (in which case he can exclude up to $250,000 of gain or up to $500,000 if he is married and meets the IRS requirements) depending on the price he will get, he may have to pay a hefty capital gains tax. Currently, the federal rate is 15 percent, but that may increase in the future.
I suggest that you discuss your plan with a financial advisor, as I can provide you with only general information.
As for your granddaughter, I would suggest that she sell you the lot and that you build your house there. Prepare a last will and testament, giving the new house to your granddaughter. This way, you can live there as long as you like, and on your death she will get the stepped-up basis (i.e. the value of the house on the date of your death).
DEAR BENNY: My mother recently passed away and my father wants to move closer to his sisters and the rest of our family. He wants to give me his house. It is completely paid for so I plan on moving in and selling my current home. My question is this: Would it be best if he "gifted" the house to me or should we wait till I inherit? It’s going to be my primary residence either way. –Kevin
DEAR KEVIN: I put your question here because it is similar to my earlier answer. If your father gifts you the house, his basis for tax purposes will be yours. I suspect his basis may be low, especially if he has owned the house for a long time. You have to determine his basis, and there is a difference in the way it is computed if you are in a community property state (the Western states).
Of course, if you own and live in the house for two out of the five years before it is sold, you can exclude up to $250,000 of any profit (or up to $500,000 if you are married).
My preference is for your father to leave the house to you in his last will and testament — but of course that is his decision to make.
DEAR BENNY: Out of the blue one day, a company called me and stated that my house has faulty siding and that they can process my claim for money set aside to repair the siding. I haven’t received any class-action lawsuit notification or even heard of one from anyone else. I asked the person calling what her company gets out of it. She said that they would get nothing unless I received a check from the fund administrator (a court official, I assume). When I received a settlement check, the company would then share it with me 60/40, with me getting the 60 percent. Aside from that moment, they wanted no money up front.
My question is: If I truly have money coming because of faulty siding on my home, why can’t I deal with the court administrator directed, thus keeping the full 100 percent? How would I know how to contact such a person? –J.H.
DEAR J.H.: I am always leery of people who suddenly appear and tell you that you have money coming to you. This may be legal, but neither of us knows this at the present time. Typically, in a class action, all prospective members of the class are notified — usually by mail or sometimes in the local newspapers.
You do not need that company. I just went to my favorite search engine on the Internet and typed in "siding class action". You will find a number of such hits on the Web. Contact the plaintiff’s attorney (not the court) and try to determine if you are (or can be) a part of the class action.
However, many class actions are settled where the attorneys get a large fee, but the class members get only a few dollars. Check references of the company that solicited you with your state’s attorney general’s office and the Better Business Bureau. If they check out, make sure that you have a written agreement with the company, but do not under any circumstances give out any personal information (such as Social Security number, credit-card number). You should also contact an attorney who may be able to track down the class action.
Benny L. 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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