In August 2009, my wife and I—both now 75 years old—purchased a foreclosure condominium in Port Hueneme, Calif., for $120,000 in cash. Since then our son is living in a rented house. We paid both the homeowner’s union fee and the property tax of $2,000 per year because he worked a minimum-wage job.
We told our son years ago that someday the property would be put in his name. Recently, both of us have agreed to transfer the property from our family trust to his name.
So here’s my question: Today, the condo is worth about $250,000. If we claim our son to be abandoned, what, if any, will there be tax consequences? And whose responsibility is it to pay for those consequences, us or him?
Note: We are currently discussing whether he can sell the house and move, or stay and refinance.
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It is wonderful to see how generous your wife and you have been towards your son for over a decade. I am sure he is very grateful for your help. That gift—because, yes, it was a gift—certainly helped her make ends meet on a limited budget, and especially in the midst of the worst years of the Great Recession.
I am also glad that this exchange between you and them is clearly being discussed openly among all involved. Too often, my colleagues and I hear from readers who are struggling to resolve difficult financial issues between families, and inevitably suspense and prejudice get in the way of clear decisions.
Before I delve into the potential financial implications of the transfer, I want you and your wife to consider what your goal is in transferring the property. Are you trying to give your son more financial freedom? Are you trying to take the financial load off your back?
I ask this question because it is not a decision to be taken lightly. As Matthew Saneholtz, senior wealth advisor and co-owner of Tobias Financial Advisors in Plantation, Fla., suggested when I described your situation, moving the condo to your son could be a valuable financial option for you and your husband. can be away.
“They will no longer be able to deduct the taxes paid if [the property was] Owned by the son,” Sanenholtz said, adding that you would also lose out on a potential back-up plan.
He said, “Anything can happen in life and it may be in the best interest of the parents to have the option of potentially selling the property for their own use or needs as opposed to gifting it to their son who will give it away.” Can’t give back.”
There are other financial considerations that you and your wife are already considering. Leaving your son home will be considered a gift, as he will not pay you for it. You’ll need to file a gift-tax return because the value of the condo exceeds the annual exclusion ($32,000 for a couple in 2022).
,A claim to leave home for a child would be considered a gift to the IRS.,
Along with the gift tax, there’s also a large lifetime exclusion, so any gifts below that amount are ultimately not taxed. But if you exceed that amount — $11.7 million by 2021 — taxes will be owed. You will be the one to pay them.
The other main consideration is the tax basis for any capital gains once the condo is sold. The cost basis for a home is the price that was paid to purchase it, plus costs related to renovations and other expenses. In this case, the condo was purchased for $120,000 — so assuming it sold for $250,000, the capital gain would be $130,000, before any other costs were included.
Generally, when a child inherits a home from their parents, they receive a step-up on the basis, so the cost basis used to calculate capital gains is calculated as the property at the time of their death. The value is adjusted as. This can lead to huge tax savings. Usually the difference between the sale price of the home and the step-up basis is very small because heirs usually sell it soon after they inherit it.
By leaving your son at home, he will not be eligible on step-up basis. So the cost basis used to calculate future capital gains will be the price you both paid in 2009.
Imagine a scenario where you put the deed in your son’s name, and he sells the condo for $500,000 a decade down the road due to rising property values. The capital gain would be $380,000. If the condo was still his primary residence and he was unmarried, he would be exempt from paying capital gains taxes on the first $250,000 of gains, but would have to pay taxes on the rest. Had he converted the condo into an investment property, he would not have been eligible for that exclusion and would have needed to take other steps to avoid a larger tax bill.
Given the potential tax savings at hand, it’s worth rethinking the strategy you’ve all been considering. It may be in your son’s best interest to remain in the family trust until you and your wife have passed away, so he may qualify for step-up Aadhaar.
,Putting the property in the name of the son can expose him to the creditors.,
But taxes are only one of my concerns. My biggest concern is that your son may not be ready to take care of the household expenses. You did not say whether you would continue to pay both property taxes and condo fees after the name of the unit. If that’s the case, you need to make that clear to her and make sure she has enough money left over or enough income to cover those expenses.
Also, if the house is in his name, he may fall prey to creditors. If your son has any outstanding debt, those companies can recover his money through condos. And I’d be careful about assuming that he could take out a refinance loan to cover those debts. Mortgage lenders must assess a potential borrower’s ability to repay. Depending on his credit score and debt-to-income ratio, he may not be eligible for the loan.
Before proceeding, enlist the assistance of an attorney, an accountant and/or a financial advisor, who can walk you through your options and help you decide on the most beneficial option. The last thing I’m sure any of you would want is for this gift to become a burden.
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