The tax consequences will be when she goes to sell it, and has to pay capital gains taxes on the whole amount (minus a buck). HS’s sister may get hit with a gift tax if she doesn’t do it correctly.
And yes - it’s the dumb thing that people do to avoid estate taxes that they aren’t in any danger of running into. (Estate taxes don’t kick in until after the first $22.92 MILLION.)
If she does it right, it would probably just reduce the amount of the $22mm exemption from the estate tax. Let’s say the house is worth $1mm and she gifts it to her daughter. Her estate tax exemption might only be $21mm after that.
Note, PA estate taxes might kick in much lower. I have no idea.
I think she should sell it “as is” on the open market and take the money and run. You didn’t say, but I’m thinking “bought it new around 1970” means that she has paid off the mortgage, so whatever money she gets from the sale will be hers. I emphasize “hers” because the daughter washed her hands of the whole situation when she refused to help so, in my mind anyway, she has lost her rights as an heir.
I agree. That was the first red flag!
I don’t think that’s a red flag at all. We apparently aren’t talking about a few hundred dollars. Why would I spend a significant sum of money repairing a house that needs serious work done when I don’t own it and may never own it? The daughter may be the only heir * but that doesn’t mean her mother won’t sell the house and spend the proceeds or remarry and leave the house to the second husband.
If the mother sells the daughter the house and retains a life estate , there may not be any problem in getting a home equity loan. My sister did just that to renovate her apartment in the house she bought from my mother.
But they definitely need a real estate attorney to do this.
* Or she might not be- in some jurisdictions the son can’t be completely disinherited.
O.P. does state “she owns the house” so I assumed that was the case.
One son estranged, and the daughter seems to be trying to grift her own mother. Hmmm …
So the dynamics are odd. Delving a bit deeper …
Something isn’t clear to me … who’s living rent free, whose lifetime is involved in the rent-free clause, and who’s paying for all the needed maintenance?
And who’s deciding what’s “needed” vs. what’s “nice to have” and who’s choosing the contractor? Lowest bidder w/ shoddy work vs. more $$ for better quality will depend on who’s controlling the purse strings.
Is daughter’s living situation that precarious, that she has to get this house instead of living in her own?
Looking at someone’s motivation can tell you a lot about whether or not they’re offering a good deal out of kindness, or a scam-y deal out of self interest.
You said she doesn’t want to help … but then she put forth this offer.
Putting all ^^ together, and I’d say it’s not a good idea. But the final answer should come from an impartial attorney.
My idea of the daughter not wanting to help, is that she doesn’t want to help her mom at all. I wasn’t thinking that she was expected to take on all of the repairs and updates.
If the house needs serious maintenance and mom doesn’t have the money for it, the daughter kicking in a few hundred ( or even a couple thousand) won’t make a difference. Shortly after my sister bought my mother’s house for much the same reason, she had to spend over 10 grand on a new boiler and asbestos abatement. If my sister gave my mother even half of it, my mother wouldn’t have been able to come up with the rest.
Which reminds me of something to watch out for - my mother sold the house to my sister because mom couldn’t afford to maintain it and didn’t want to move but now that my sister is paying for the repairs/renovations/bills, my mother still wants to call the shots about what to do and who to hire.
To answer some of the questions raised above, the mortgage is surely paid off. Both the daughter and son-in-law are in well-paid jobs (I would guess they each make well over 100K) and they have a large house they are happy in. They have two sons, one about to start looking at colleges, the other a couple years younger that they will have to educate. My sister will not have a large estate, but I think she is thinking of leaving it to her two nephews, bypassing the daughter. She would have no other heirs. Except me, I guess, but that is not in question.
Let me explain about her husband’s will. By the separation agreement, she got the house and half their bank accounts and agreed not to share in the estate. Their son, a lawyer, drew up his will and it provided that 40% went to himself, 30% to his sister, 30% to his 20 something squeeze (my sister calls her the whore). That is one–but only one–reason why she is estranged from the son. Her husband was at the beginning of Alzheimer’s when he signed it. It could possibly be broken, but it wasn’t large enough to be worth it.
Yes, the question of what kind of maintenance is probably the crux of the question. The basic advice I am reading here is that she should sell the house and get an apartment. I told her that even before her daughter’s offer came. By the way, she is only 75 so she could have a lot of years ahead of her.
Maybe she should talk to an attorney. She will be hesitant and I will offer to pay for it, which I did once before.
Can the reverse happen? Which is that the daughter loans the mother an amount both deem appropriate for repair and upkeep of the house but that loan is backed up by a lien on the house such that any sale requires the daughter to be paid first before any amount goes to the mother/estate?
That way, the mother keeps the title and still gets to live in the house and there is also simultaneously enough cash available to keep the house in good repair.
I may be misreading it, but it sounds like the relationship between mother and daughter is strained at the very least. If your sister commits to this based on a handshake deal, she’s likely to find herself with no assets and little recourse should daughter renege or maliciously interpret the terms of the deal (“Here’s your room Mom, just squeeze in next to the hot water heater.”). Even with a more formal agreement drafted by an attorney, if the two parties mistrust each other, it’s just going to be constant warfare over what constitutes breach of the agreement.
Her best options are the ones that have been outlined above – sell or secure a home equity loan for the repairs.
What sort of repairs would the house need for this serious maintenance? I was just talking with someone who was looking into a home equity loan and the payment was about $300 for a $30k loan. If we knew the types of repairs needed, we could probably get a general idea of how much of a loan she would need and what her payments would be.
Complicated financial arrangements with family members when the goodwill doesn’t exist for them to just help out with no quid pro quo seem like a really bad idea. An attorney’s role would be to point out unforeseen potential problems with a plan that seems like a good one, but this plan already seems like a poor one.
Is this a large family house? Does she have great sentimental attachment to it, or is she just daunted by the prospect of moving? I really think the best advice you can give her is to bite the bullet, sell the house and move into a more suitable small low-maintenance property - somewhere that she can live in as long as possible while healthy and independent, and ideally something that will be easy to sell if her circumstances change.
I think the advice I would be looking for would be more for expert planning around benefits, I guess that might be a reason not to sell and have significant non-property assets.
So … these nephews are your sons ?
(or did you mean grandsons ?)
Misspoke. My nephews, her grandsons. Thinking from my point of view.
Insert RoboCop answer here
Sell the house and get an apartment. It’s not worth the hassles of questions concerning what is covered or not.
However, if she does sell the house that way then:
This. It’s important to consult attorneys for “friendly” transactions as well. Good fences make good neighbors and being really clear on deals helps families stay together.
Has anybody asked what happens when the mother wants/needs to move into an old-age facility?
Right now she owns a house. If she sells it for $1, what assets will she have for her old age?
This whole thing seems untrustworthy…like something Donald Trump would do to his family. .
Given the daughter’s reluctance to help out without getting essentially gifted the house, I’d be worried about just how well she’d follow through on her promise to do the needed maintenance. I’d advise sister to sell the house ‘as is’ now, and let those headaches be Somebody Else’s Problem.
But if she wants to essentially give the house to her daughter, she should give it rather than sell it. (With a lawyer doing the paperwork, of course.) The advantages of giving rather than selling for $1:
No tax at the time of sale - gift tax is paid by the giver, and in the U.S. that’s part of unified estate and gift taxation. Unless sister’s estate is going to be in 8 figures (which sounds like it’s not remotely a concern) there will be no tax, either now or on her death.
And being a gift, it doesn’t count as income for the recipient. So no worries about taxing authorities saying to the daughter, “you paid $1 for this house, but it’s appraised at $160,000, so you had $159,999 of undeclared income.”
Also, whenever she sells, she gets the stepped-up basis for capital gains purposes. If it’s appraised at $160K now, and she sells it for $250K, she pays the gain on that last $90K rather than on $250K - $1.
The other thing I’d recommend is that the life estate be set up as a contract, signed by both parties immediately before the gift or sale takes place, to take effect upon that gift or sale, granting sister the right to live in the house as long as she chooses, and contractually requiring the daughter to maintain the premises in habitable condition, so that there is no obstacle to the house having power, water, sewer, etc. other than sister’s potential failure to pay the bills. It should also state specific maintenance that already needs to be done that the daughter will pay to have done within X months. Also who is responsible for the property taxes (presumably daughter) and utilities (presumably sister).
IOW, sister should definitely get a lawyer if she wants to go this route. It gets complicated. There’s a lot to be said for selling.
This is absolutely incorrect. She gets a step up ONLY if she inherits - not if she purchases it for $1, or if it was gifted to her.