Question re: selling house to family member

I have a half interest (with my brother) in my mother’s house. One of my sons is going to buy it.

My brother and I appreciate that he’s doing this – keeping the house in the family – and although he doesn’t need it, we’d like to help him out.

Would it be better (for my son) if he pays a fair price for the house, and my brother and I make him a money gift?

Or should we reduce the price of the house so his mortgage is smaller to begin with?

Anyone ever done this?

My house once belonged to my wife’s grandparents. When they died, it was willed to my wife and her brother. Since my wife and her then-husband had a daughter and the brother was single, he sold his half to her for the fair market value. Fairly simple, legal-wise. I guess it depends on your son’s current financial status. Keep in mind the evils of doing business with blood relatives, though.

I don’t practice this type of law so this advice is offered solely as a lay-person but . . .

My understanding is that the IRS will assess taxes from the sale based on fair market value of the house. If you sell the house for less than FMV then the IRS will consider the difference between FMV and the sale price to be a gift to your son and tax the sale and the gift accordingly. So either way you will be making a gift to your son. The question is which way is the most advantageous from a tax perspective and that I frankly don’t know. You might ask your lawyer and/or your accountant. You might also keep in mind – if you and your brother are not your mother’s only heirs – that you may have a duty not to dissipate her estate by selling a major asset out of it for less than FMV.

But frankly I don’t know – terms like “estates” and “taxes” make my eyes glaze over. Sorry.

My brother and I are the only heirs and we’re in agreement that we want to give my son a break on mom’s house – we’re just not sure which way would be best for him.

My eyes started to glaze over as soon as I read “IRS” and “assess.” I’m sweating a bit too. :slight_smile:

Thanks, both of you. I hate financial stuff.

IAAL, but I am offering the following as an example only. The client in question made the arrangements described below in 1996, and the tax law has changed substantially since then. Please, consult an accountant and/or a tax law specialist before undertaking any form of estate planning. The penalties for understating income or an estate can be quite substantial, including jail time.

What we did for a family in similar circumstances was to document a loan from parent to child, with a note that stated a rate of interest considered “fair” under tax laws. The parties then orally agreed that the parents would forgive the loan (principal and interest together) at a rate of just under $10,000 per annum. (Under current law, $10,000 is the maximum annual gift a person can make tax-free under federal estate and gift tax.) We then prepared a series of identical waiver documents, one for each year, which the parties would sign to evidence the forgiveness of the loan payment for that year.

One risk with this course of action is that the tax code could change before the loan has been entirely forgiven. That could create a very difficult situation, since an agressive IRS officer might try to reclassify prior years’ waivers as income to the child. Moral: Don’t try this at home, kids! If you want to pursue this sort of plan, please consult a good tax lawyer - and make sure he or sshe is familiar not only with federal law but with your state’s law, whose estate and gift provisions can differ dramatically.

OxyMoron – that sounds very workable. Thanks!

I guess I’m exploring some options ahead of time so I’ll have an idea of what questions to ask an attorney.

When I worked in a land titles office, I used to see this kind of thing frequently. But that was some years ago, and things may have changed. And they may differ in your location, so check everything with a lawyer before proceeding. I’m neither a lawyer nor a tax accountant, so you proceed with this advice at your own risk.

First of all, you and your brother hold title to the property. Have your brother work with you (and a lawyer) to file a deed that gives your son one-third interest in the property, along with you and your brother. We used to call this a “two-dollar transfer,” two dollars being the minimum amount that any interest in property could be transferred for in our jurisdiction. (Whether or not the money actually changed hands didn’t matter.)

Then, you and your brother file what’s called a “Quit Claim Deed,” where you both turn over the property to your son for two dollars and “natural love and affection,” as it’s known legally.

This makes the property his, (and Land Titles or the Registry Office, or whatever it’s called where you are, happy) but you still have the question of the sale money. But you and your brother and your son can arrange with a bank to have them grant a loan (mortgage, if you prefer). Your son borrows from the bank and pays you immediately, while paying the bank back according to a mutually-acceptable schedule. The sum can be whatever you and your brother decide is fair to your son.

This worked in my jurisdiction, because anybody could be granted a share in title without being charged capital gains tax. Further, capital gains were not taxed if one of the title holders “bought” the others out or the other title holders quit the claim to title, as this method uses. As far as Land Titles/Registry Office/another government agency is concerned, the deal was done for the sum of two dollars and natural love and affection.

As I mentioned, I used to see this thing all the time–transfers filed at, say, noon, and Quit Claims from title holders mentioned in the noon filing coming through at 12:05 p.m. We knew that there was some financing going on that wasn’t shown on the paperwork.

But also, as I mentioned, this worked some years ago. I no longer work in Land Titles, and I am neither a lawyer nor a tax accountant. I would seek out their advice before proceeding with a method such as this.

As someone with some experience in these types of matters, I can unequivocally state that the issues are much too complex to be answered simply on a message board.

You need to consider, among other things, federal, state and local income taxes, gift/estate taxes, and real estate transfer taxes. If the transaction is structured improperly, you, your brother or your son could have significant adverse tax consequnces.

Please consult an experienced tax advisor in your locality. Structuring the transaction to minimize taxes should be well worth the advisor’s fees.

That being said, if you are looking to prepare for a meeting with an attorney or other tax advisor, please go to the meeting with copies of all documents from your mother’s estate, and in particular any estate tax returns or other tax documents. Be prepared to answer questions about the finances, assets, and tax situations of you, your brother, and your son. Having copies of each of your recent tax returns (and any prior gift tax returns) would be helpful as well.

The best result will be a trade off between income, estate/gift, and gains tax consequenses among you, your brother, and your son.

Good luck.

Good advice. In addition, don’t forget good old fashion property taxes either. Because it’s a transfer from parent to child, you may be able to avoid a reassessment of the property, which could save substantial dollars down the road (at least in California).

Bildo, shelbo and Spoons – (those names sound like they belong together, don’t they? – thanks for more good information.

I think I’ll print this thread and have it handy when I talk to the lawyer. So far, he’s just filed the petition for probate. He said he’d help with the sale of the house if we needed him – sounds like we probably will.

Appreciate everyone’s time responding here. Thanks. :slight_smile: