Transferring House to Daughter

[Jerry1]

In 2011 we bought a house for our daughter. We titled the house in three names, me, DW and DD. DD is married and was married when we bought the house. The house was bought for $60K and we put $30K into it. We think the house is currently worth about $150K (yeah, I wish I’d have bought a couple more at that time).

Since 2011, DD has paid us $600 per month. Not sure what to call this as we have no formal agreement. In DD’s mind, she thinks she’s buying the house. In our minds, we’ve already given her the house and we just use the money to pay for things like property taxes, insurance and repairs. Over time we’ve become the bank so, for example, when they needed a car, we bought it and they increased their payment to $800. Their cell phones are on our Sprint account and that increases the monthly amount they pay us to $900. All this is good. We have no issues with the situation. Please don’t focus on letting my DD fly on her own. We’ll get to that. At this point in time, the “account” sits at $24K. That is the net amount they’ve paid us. Subtractions to the account are taxes, repairs and the car and additions to the account are the payments. All this is just so you understand the situation to date.

So here’s the deal. We want to formally give DD the house. We would probably just keep the $24K (it’s only an account on paper; there are no designated separate funds). What we would be giving her is about equal to what we spent on other daughter for her college so we’re calling this even. So, how do I make the transfer?

If I gift her mine and DW’s share, that doesn’t give her husband any share in the house. If we sell them the house then there would be significant tax consequences. In Michigan, the seller has to pay sales tax (6%). Of course this seems stupid given that DD already owns 1/3 of the house. If we give them our share of the house, I don’t even know how to do that. At some point I want mine and DW’s name off the title and I want DD and SIL’s name on the title. FWIW, we titled the house the way we did to protect against any problems in a divorce. At this point, not only are we comfortable that SIL is a good husband/father, frankly, he’s earned it. Not only is he the only bread winner, he has put up with DD for over 10 years (enough said on that ).

Sorry for being long winded (posting). I’d really appreciate some ideas on how to do this or at least where to look for answers. I know there are people on this forum that have backgrounds in this area (real estate, legal, accountants) and I'd greatly appreciate hearing from you on this.

Thank you!

 

[calmloki]

Thinking you gift daughter the house. We gifted a property and it was just counted against our lifetime gift tax exclusion.
https://www.fool.com/taxes/2019/01/05/gift-tax-in-2019-how-much-can-you-give-before-havi.aspx
IRS form 709 to report.
We just got a number of values on the property ( RE agent appraisal, insurance coverage, "true cash value" per property tax statement) and used a defensible amount. Got a deed, filled it out, recorded it at the county. Pretty inexpensive and we saw no reason to complicate or spend extra on a place we'd owned 20+ years. Big warning: you can only give away 11 million or so over your lifetime, so if that is an issue... it wasn't for us.

 

[aja8888]

Besides the gifting reporting part, the transfer can be done with a Quit Claim deed. Any good real estate attorney can handle this or if you have them, a title company attorney.

 

[Doribe]

Besides the gifting reporting part, the transfer can be done with a Quit Claim deed. Any good real estate attorney can handle this or if you have them, a title company attorney.

+1

 

[Jerry1]

Thinking you gift daughter the house. We gifted a property and it was just counted against our lifetime gift tax exclusion.
https://www.fool.com/taxes/2019/01/05/gift-tax-in-2019-how-much-can-you-give-before-havi.aspx
IRS form 709 to report.
We just got a number of values on the property ( RE agent appraisal, insurance coverage, "true cash value" per property tax statement) and used a defensible amount. Got a deed, filled it out, recorded it at the county. Pretty inexpensive and we saw no reason to complicate or spend extra on a place we'd owned 20+ years. Big warning: you can only give away 11 million or so over your lifetime, so if that is an issue... it wasn't for us.

So I have to gift market value and not my basis?

I'll have to look into recording it and if that can somehow avoid the sales tax given that it will be a gift (i.e., no actual sale).

So, why does everyone always say you can only give $15K per year? Is that just the amount before you have to report it (file a gift tax return)? Thanks for the big warning . I'm pretty sure I'll never have to worry about gifting more than $11M.

 

[Jerry1]

Besides the gifting reporting part, the transfer can be done with a Quit Claim deed. Any good real estate attorney can handle this or if you have them, a title company attorney.

I kind of understand a Quit Claim Deed, but I kind of prefer that a deed is produced in his (SIL) and her (DD) name. Maybe a false concern, but I worry that somehow the QCD will be forgotten/challenged whereas a formal full deed will not.

One thing I'm trying to accomplish is complete removal of mine and DW's name from the property. Basically for liability reasons, small as that may be. The other thing is I'm trying to formalize that the house belongs to them as a married couple. I don't understand if a QCD will accomplish both those objectives. A trip to the real estate attorney was expected.

 

[Sunset]

So I have to gift market value and not my basis?

I'll have to look into recording it and if that can somehow avoid the sales tax given that it will be a gift (i.e., no actual sale).

So, why does everyone always say you can only give $15K per year? Is that just the amount before you have to report it (file a gift tax return)? Thanks for the big warning . I'm pretty sure I'll never have to worry about gifting more than $11M.

You are correct about the $15K gift, and it's per person per year.

As to the gifting of the property, a gift is not a sale, but of course every State is different, but a real estate lawyer would know for your State.

My Mom gifted a property to myself and sibling, and 10 years later my sibling gifted the 50% to me. Just last year my DD asked me when would I be gifting the property to her .

All this gifting involved a lawyer, so it would be legit and not have to pay anything other than a $200 town transfer tax.

 

[calmloki]

So I have to gift market value and not my basis?

I'll have to look into recording it and if that can somehow avoid the sales tax given that it will be a gift (i.e., no actual sale).

So, why does everyone always say you can only give $15K per year? Is that just the amount before you have to report it (file a gift tax return)? Thanks for the big warning . I'm pretty sure I'll never have to worry about gifting more than $11M.

The link I posted is going to be clearer, and our tax person told us what we needed to do, but I think it is $15k per person without reporting to the IRS. Over $15k and you have to report using IRS form 709 and use some portion of your lifetime gift tax exclusion of 11 million+ - but you still avoid paying any tax.

You are gifting the value of the appreciated asset at the time of gift, so you want evidence to support the value you report.

Sales tax I can't speak too.

We just used a Stevens-Ness form for the deed as I recall, using the legal description from the time we bought the property. I'm cheap and the form was simple. Knew we had closed with a clean title search when we bought, knew we had no liens or judgments against it during our ownership so we gifted without the use of a lawyer to bless the transfer.

 

[cathy63]

I kind of understand a Quit Claim Deed, but I kind of prefer that a deed is produced in his (SIL) and her (DD) name. Maybe a false concern, but I worry that somehow the QCD will be forgotten/challenged whereas a formal full deed will not.

One thing I'm trying to accomplish is complete removal of mine and DW's name from the property. Basically for liability reasons, small as that may be. The other thing is I'm trying to formalize that the house belongs to them as a married couple. I don't understand if a QCD will accomplish both those objectives. A trip to the real estate attorney was expected.

A Quit Claim Deed is a real deed. The Grantors will be you and your spouse. The Grantees will be your DD and her spouse. You and your spouse will both have your signatures notarized, and the new deed will be recorded at the county office where the property is located. Henceforth, your DD and SIL will be joint tenants, each owning 50% of the property.

This is a gift of $100K (since your DD already owns $50K interest in the property). You'll have to file a gift tax return since that's $40K more than you can give them without doing so, but you won't owe any federal tax.

You should discuss this with a real estate lawyer in Michigan, but I believe this can be done as a tax-free transaction. Here's the law: Michigan Legislature - Section 207.526

The following written instruments and transfers of property are exempt from the tax imposed by this act: [...]
(i) A conveyance from a spouse or married couple creating or disjoining a tenancy by the entireties in the grantors or the grantor and his or her spouse.
(j) A conveyance from an individual to that individual's child, stepchild, or adopted child.

It seems to me that the worst case would be that you transfer the entire amount to your daughter and then she transfers half of her interest to her spouse. A lawyer can tell you whether you can do this with one deed or whether it needs two.

 

[Jerry1]

You guys are great. Thank you so much. Cathy, thanks for doing that research. I never get it in my head how much of that stuff is available online now.

 

[aja8888]

Jerry, I did the same house transfer with my DD several years ago using a Quit Claim deed. Pretty simple and once it's recorded, it's all done.

Good luck!

 

[bingybear]

I understand how the gifting gets rid of taxes associated with the gift. What about taxes on the "sale" of the house? Does the OP owe capital gains on the transfer/sale of the house? Or did I miss that in the discussion.

 

[Luck_Club]

Food for thought:
From your description, DD seems to have trouble managing finances. "She is using us as the bank, need a car increase the payment."

Giving complete control of the house could end up with her losing the house. IE mortgage to buy a car, boat or whatever, then fall on tough times and not be able to make the mortgage payments. POOF house is gone.

Maybe best to modify your will (explain to other children to prevent hard feelings) and or create a transfer on death title for the house and either stop taking the payments, or invest the excessive payments in a retirement IRA for your DD.

 

[cathy63]

I understand how the gifting gets rid of taxes associated with the gift. What about taxes on the "sale" of the house? Does the OP owe capital gains on the transfer/sale of the house? Or did I miss that in the discussion.

No, you don't pay capital gains when you give away an appreciated asset. The OP and spouse give away $100K of property, but DD and SIL get a house with a $90K basis ($60K purchase price + $30K improvements) and a $150K value. The capital gains tax owed will be calculated when they sell it. It's likely to be $0 since they can exclude $500K on the sale of their primary residence if they've lived in it for two years.

 

[homestead]

Food for thought:
From your description, DD seems to have trouble managing finances. "She is using us as the bank, need a car increase the payment."

Giving complete control of the house could end up with her losing the house. IE mortgage to buy a car, boat or whatever, then fall on tough times and not be able to make the mortgage payments. POOF house is gone.

Maybe best to modify your will (explain to other children to prevent hard feelings) and or create a transfer on death title for the house and either stop taking the payments, or invest the excessive payments in a retirement IRA for your DD.

This happened to my brother, parents gave him a house. He wasn't filing his taxes and in a few years they came after him and so he got a home equity loan to pay the feds. Except he didn't make his house payments either so after a time they took his house away from him.
In his case selling the house and buying him annuity would have been better.

 

[OldShooter]

At the edge of ancient explorer maps it was sometimes written "Beyond here be dragons."

The tax implications here are complex. One that has not been mentioned is the basis step-up on death. If DD inherits your share of the house she may end up completely ducking taxes on the gain from your purchase date to its value when one of you dies. This can be a big deal and often discourages gifts of this sort.

Rather than ask SGOTI about the dragons, you would be well advised to hire a real-estate-specialist CPA to develop this plan and, possibly, a specialist attorney to implement it.

 

[Jerry1]

Food for thought:
From your description, DD seems to have trouble managing finances. "She is using us as the bank, need a car increase the payment."

Giving complete control of the house could end up with her losing the house. IE mortgage to buy a car, boat or whatever, then fall on tough times and not be able to make the mortgage payments. POOF house is gone.

Maybe best to modify your will (explain to other children to prevent hard feelings) and or create a transfer on death title for the house and either stop taking the payments, or invest the excessive payments in a retirement IRA for your DD.

We’ve been the bank because they needed help and we can’t stand the thought of paying usury interest rates to “the man”. We were able to do it and happy to do so. The concern raised above is legitimate, but they have demonstrated growth and maturity in their handling of money and SIL is doing much better than when we bought the house about 8 years ago. The main thing is twofold. First, for liability reasons, we want off the title. Second, and most important, is that it’s time that they make it on their own. I think they’re ready. If they lose the house, so be it. I don’t say that lightly or naively. If times get bad, I’d hope they’d come to us and not mortgage the house, but, they’re almost 40. Time is up.

This is not a lot different that DD #2. We paid for her education. She could have not been able to get a job, etc. and we would have basically lost the over $100K we invested in her. That’s the risk we take as parents.

Good idea about the retirement account though. That may be a good answer to what to do with the money they’ve already paid.