Mom or Dad will need nursing home care sometime in the immediate future. In order to preserve the asset for the kids, should Mom and Dad sign a deed and transfer ownership of the house to the kids for one dollar? Maybe not.
First, if there is an outstanding mortgage, the transfer cannot be made without the permission of the mortgage company. Receiving this permission is extremely unlikely. Further, nearly all mortgage documents have a “due on transfer” clause, which means that if the property is transferred, the entire balance of the mortgage becomes due. In the vast majority of cases, this is untenable.
Tax Basis is another major issue to consider. If Mom and Dad transfer the house to a son or daughter, the son or daughter receives the parents’ Tax Basis. As a result, when the son or daughter sells the house in the future, there could be significant capital gains tax.
The parents’ Tax Basis is the price they paid for the home. In 1965, the house was purchased for $15,000.00. This is their Tax Basis. Today, the house is worth $200,000.00. The Capital Gain is determined by subtracting the 1965 purchase price from the sale price, today, or $185,000 ($200,000 – $15,000= $185,000). This gain would be subject to tax.
If the parents in this example transferred the house to their son, the son’s Tax Basis would be based on their parents’ Tax Basis, or $15,000.00. When the son sells the house ten years from now for $300,000.00, he would pay capital gains tax on $285,000.00.
However, if the son was left the house through the parents’ estate, the son would get the date of death value as his Tax Basis, or $200,000.00. Thus, when he sells it ten years later, for $300,000.00 he would pay capital gains on $100,000.00. Presently, this amount is exempt from the tax, but this may not be the case ten years from now.
Obviously, from a child’s point of view, it is better to receive real estate through an estate; not a as a gift.
There are other issues to consider. If you would like to discuss this further, please contact my office for an appointment.
© Shanahan & Voigt, LLC 2014
BE ADVISED that these comments are not legal opinions and are not to be relied upon as legal advice. If you need legal advice, contact your county bar association; most of which have referral services.