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 potential tax complications, especially since as I write this column there is complete uncertainty as to what the tax situation will be starting in January 2013.
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.
DEAR BENNY: My wife and I sold our home in New Jersey and moved to Melbourne, Fla., to start the last third of our lives. We looked at more than 80 homes for sale, including foreclosures, short sales, and actual homes being sold by real people.
Most of the homes were in such bad condition that it was discouraging to go out every day and look for our dream home. We finally decided that we needed to buy new to get what we were looking for. So we bought a new home, and that is when the trouble started.
The builder’s policy is for the buyer to take out a construction loan. That is, you close on your home before it is built, and when the construction of your home is completed you then modify the loan to make it permanent. The builder reimburses you the interest on the loan for the time of construction.
We then looked for a bank to handle the mortgage. We chose X bank because its loan officer was upfront and explained to us, to the best of his ability, all the charges that we were going to have. In other words, he took his time with us.
So here is my question: The house was appraised for the full value that the builder was selling it for, and was built in five months. When we were told to modify the loan, we were ready to move forward. Then something we were not told in the beginning was that the bank had the right to reappraise the house at my cost of a second appraisal. The house was appraised for $20,000 less than what it sold for five months earlier. We told this to the builder who said don’t worry, because the first appraisal is good for six months. The builder even went to the bank to look into this for me, and it was told to butt out.
In the contract it does state that the lender has the right to order a second appraisal. I would think something like this should have been brought to my attention in the beginning. This bank is the only bank so far to ask for a second appraisal of the five banks we could have gone to. So much for honesty and integrity.
The builder has not lowered its price of the same house as of the date of this letter. The builder’s only option is to stop recommending this bank to new-home buyers. Do I have any options? By contract I have to modify within 30 days of completion to maintain the locked-in interest rate. –Byron
DEAR BYRON: I understand that you are upset because the bank required a second appraisal, and it came in lower than the original one just five months earlier. But you have admitted that the contract does state that the bank has that right. So, with all respect, I am not entirely sympathetic to your situation. You knew — or should have known — about the possibility of that second appraisal. You could have tried to negotiate with a bank to accept the first appraisal, so long as no more than X months elapse between the original loan and the permanent loan.
However, are you completely ignoring the builder? His marketing plan, while not unique, is not common. Basically, he built your house at no cost to him; he was using the construction loan money instead of his own funds. He did, however, agree to reimburse you for the interest you paid on the construction loan. I assume you are still paying interest on that loan, so why not demand that he reimburse you for the interest you paid to date and start paying the future interest as well as assist you in getting a new loan?
A word of advice to my readers: Read all documents before you sign, and if you have questions, don’t be afraid to ask. And if you don’t understand what you are signing, ask an attorney for guidance.
