Selling the house to my son advise

[Booo]

I retired 6 months ago when I turned 59. We just bought a manufactured home in a gated adult community in Florida and paid cash. 8 years ago we paid, in round numbers, $150,000 for a home in Ohio. I owe $70,000 on the mortgage. I would like to help my son get in to a house and thought I could sell him this one for what I owe on it with a 'note' that he pays me my current equity of $80,000 when he sells the home in the future. I know there will be adjustments to the equity figure after an appraisal is done and closing costs are figured in. The home is sure to appreciate in value as shale oil and natural gas mining along with a multi-billion dollar ethylene cracker are coming to the next county soon.

I was told I would owe a gift tax if I don't sell at close to the appraised value. I was also told he may owe a capital gains tax on the equity when he sell the house. Are either of these statements true? Would the IOU negate the gift tax and/or the capital gains? Is it even legal for him to hold a 'note' for my equity when he sells? It could be 20 years from now. Is there a better way to get him in the house cheaply? I had plans to talk to a real estate lawyer but know you folks have the knowledge to enlighten me as to what questions I need to ask. Thank you in advance.

[Animorph]

I don't know the answer to most of the questions, but there is no way the IRS would allow an $80k zero interest loan. You'd be paying tax on imputed interest on that $80k loan.

[samclem]

Booo,
Others will have to comment on the tax angle, but I have a more fundamental question: Why help him get into >this< house? Does he want to live in this community, and is this exact house the one he would choose for himself? Does he even want to be a homeowner, or would he prefer to rent? If he wants to buy a house, what is stopping him? It would be simpler for you to sell the house, keep the amount of proceeds that you need to support yourself, and with whatever is left over help him out.

Being either a noteholder or a landlord to a family member is not a situation I'd like to be in--there's a potential for breeding resentment that can best be avoided by avoiding the whole situation. In addition to this, when friends/family rent to friends/family, it's rare that market-based prices are paid, so somebody is "giving" and somebody is "taking." If that's the case, why not just make the "giving" an explicit gift?

[someguy]

Why don't you keep the Ohio house as is and set up some kind of lease/lease to own arrangement with him? If you do a lease option with a lowish but not insane option price and if the house appreciates like you expect, your son could exercise the option in the future and gain instant equity. As long as he held the house, that would be an unrealized cap gain. If he held it at least two years before selling, there should be no gains tax. Check with an accountant/attorney of course--the only issue I can think of is ensuring that the deal is "arm's length". That also protects your $ more.

Or sell the house and gift him cash for a down payment?

[youbet]

Quote:

Originally Posted by samclem Being either a noteholder or a landlord to a family member is not a situation I'd like to be in--there's a potential for breeding resentment that can best be avoided by avoiding the whole situation.

+1

Unless you son really craves your specific house and your family is unusually good at living with co-mingled finances, take the advise of simply selling your home and gifting him some money to help him in life.

[imoldernu]

Suggestions from BankRate
7 Tips for Selling Your Home to Family

[OAG]

We sold our paid for home to my DS & DDIL about 10 years ago. Sold for a bit below market value for cash. The below market value portion was a gift (within the allowed amount). Personally would not consider any type of inter-family loan - have him get a third party mortgage. You can probably gift the down payment.

[dvalley]

Isn't there a lifetime gift limit of $5M before the gift taxes have to be paid?

[Animorph]

Quote:

Originally Posted by dvalley Isn't there a lifetime gift limit of $5M before the gift taxes have to be paid?

Yeah, though goes against the estate tax exemption. Gifts under $14k/person/year don't count against that limit. Gifts larger than that incur some paperwork until the estate is settled, but no immediate tax, AFAIK.

Frequently Asked Questions on Gift Taxes

"to Publication 950, Introduction to Estate and Gift Taxes.
How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012 and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift.
What if my spouse and I want to give away property that we own together?
You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013.
What other information do I need to include with the return?
Refer to Form 709 (PDF), 709 Instructions and Publication 950. Among other items listed:

1. Copies of appraisals.
   
2. Copies of relevant documents regarding the transfer.
   
3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

What is "Fair Market Value?"
Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1."

[ivinsfan]

Hi Booo, you have started a second thread about gifting and helping family. The other thread you started on the subject got a lot of thoughtful replies. I don't remember if you checked back to clarify what you are presently thinking about giving to others. I do remember you said you didn't know if you could continue to keep helping out once you ER.

I realize you are asking for tax and money advice about selling the house, not asking if anyone thinks it is a good idea, but I'm still wondering what is going thru your mind now, you are tying up equity you could be using to improve your ER if you sell the house to your son.

[frugalscholar]

We bought a house in New Orleans to help our son get started. He RENTS the house from us--with the help of two roommates (all 25). In a few years, IF he can afford it, we will sell him the house AT THE IRS designated rate for family members (about 1% under the regular mortgage rate). If he does buy it, we will draw up a regular mortgage contract. We hope to help our daughter out similarly in the future.

Even if we only had one child, I would never commingle finances. Right now, we get the various deductions associated with rental property; he gets a nice place to live in an area with rapidly rising prices. In the future, if he does buy the house, he will get a very good mortgage rate and we will have a stream of retirement income.

[samclem]

Quote:

Originally Posted by frugalscholar Right now, we get the various deductions associated with rental property; he gets a nice place to live in an area with rapidly rising prices. In the future, if he does buy the house, he will get a very good mortgage rate and we will have a stream of retirement income.

This can work well, but if a Booo needs the income for living expenses, then Booo needs to be willing to evict the son (if renting) or foreclose (if carrying a note) if the money doesn't come in on time. The situation could happen (I'm assuming there's some reason the son can't get a conventional mortgage now. That could be germane to the discussion.). That's a lot of stress for everyone concerned.

[braumeister]

When I see topics like this, I just shudder to myself. Like many, I have some truly dreadful horror stories about lending money to relatives.

[dvalley]

Quote:

Originally Posted by Animorph Yeah, though goes against the estate tax exemption. Gifts under $14k/person/year don't count against that limit. Gifts larger than that incur some paperwork until the estate is settled, but no immediate tax, AFAIK.

In my case I'll never use up the $5M lifetime exemption so gifting $70-100k as in the case of OP would be just fine then. Not that I'm anywhere close to ER or anything but I do want to leave something to DD when I exit this lovely place kicking and screaming at 95

[Bestwifeever]

No good deed goes unpunished.

[pb4uski]

Sell him the house for $150k and take a $70k amortizing mortgage and a $80k interest only mortgage. Then forgive the payments on the interest only mortgage and the forgiven payments are an annual gift to your son but would be well within the annual gift allowance.

If he later sells, he'll owe you the remaining balance of the $70k mortgage and the $80k principal of the interest only mortgage.

[Booo]

Quote:

Originally Posted by pb4uski Sell him the house for $150k and take a $70k amortizing mortgage and a $80k interest only mortgage. Then forgive the payments on the interest only mortgage and the forgiven payments are an annual gift to your son but would be well within the annual gift allowance. If he later sells, he'll owe you the remaining balance of the $70k mortgage and the $80k principal of the interest only mortgage.

This is exactly what I'd like to do. Thank you for your incite.

[Booo]

Quote:

Originally Posted by ivinsfan Hi Booo, you have started a second thread about gifting and helping family. The other thread you started on the subject got a lot of thoughtful replies. I don't remember if you checked back to clarify what you are presently thinking about giving to others. I do remember you said you didn't know if you could continue to keep helping out once you ER. I realize you are asking for tax and money advice about selling the house, not asking if anyone thinks it is a good idea, but I'm still wondering what is going thru your mind now, you are tying up equity you could be using to improve your ER if you sell the house to your son.

I wasn't looking at the equity in my house as being tied up. I was looking at it as diversifying in real estate.

You are absolutely correct in saying I got a lot of thoughtful replies to my thread on my ER guilt and giving money to my in-laws. When I'm finally settled in Florida, I plan on writing back to the replies.
I do worry about my wife running out of money when she gets to be very old. No one knows what the future will bring. I had a co-worker retire at 66 years old in August of 2001. We all know what happened on 9-11. He lost $600,000 that week in the market.

I fear my MIL has a gambling problem and that's why she asked for the money. When she asked for the money, she said don't mention it to my FIL as she did the bills and he wouldn't understand. I told her to explain it to him and have him call me for the money. She called back and said she overreacted and she doesn't need the money now. Wow.

[Booo]

Quote:

Originally Posted by youbet +1 Unless you son really craves your specific house and your family is unusually good at living with co-mingled finances, take the advise of simply selling your home and gifting him some money to help him in life.

Thank you for the advice.

My son is 22 years old and graduated from college 2 days ago. Seems like just yesterday he craved a new skate board. I know he doesn't crave mowing the 3 acres of grass surrounding the house. He does crave financial independence and I thought owning a home would be a good start. He started work for a great company last summer and worked most of the year when he could. He had a baseball scholarship to help pay for college and couldn't work during the season but had saved enough money to rent an apartment and pay all of his bills. Right now he's going to rent the house with an option to buy and I wanted to know what all the purchase options are if/when he's ready to make the commitment. ALL the stars will have to line up for this to work but I had to look at it.

It's impossible to make good decisions without knowing the facts but people do it all the time. People decide when to take their SS without knowing when they'll die. Why does the government make you do that?

[Surewhitey]

We chose to go ahead and loan 80% to DD & SIL. This is loan #2 and she's working with an accountant so she knows the savings on closing & the value of .5% lower rate than the best rate available (to follow I'm rules)

She has always been on time and half the time pays more. I have no problem loaning her $. Other family, I'd be more weary. If they can provide a down-payment, maybe... She's 28 and working at the same job for 10 years now.