Avoid FHA financing restriction on intrafamily purchase

Becoming a renter helps your position

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 20, 2012

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Becoming a renter helps your position

Benny Kass
Inman News®

DEAR BENNY: I am currently trying to purchase a home from my daughter. The loan was approved, but the lender told me there is a law that if you purchase a home from a family member, they can finance only 85 percent of the sales price. Is this true? --Roger

DEAR ROGER: I was not aware of this so I contacted Craig Strent, from Apex Mortgage in the Washington, D.C., metropolitan area. He confirmed that FHA has such a guideline. The only exception is if you have been a tenant in the property and have been so for at least the previous six months.

Why not move in and rent the house from your daughter for six months? Interest rates are currently very low. While I doubt rates will go up soon, no one can predict where rates will be in six months. You have to make a business judgment whether you will be better off just taking the 85 percent loan (if you can come up with the difference) instead of waiting the six months.

DEAR BENNY: I put my estate in a trust. I would like to make sure that I understand everything correctly. I am leaving my house in the trust to my son. I was told that when I die the trust prevents probate. I want to make sure that when I go my son will just have to go to the courthouse and have the house moved out of my name into his with out any cost to him or having him to go through probate. Am I right about this? --Tim

DEAR TIM: If the terms of the trust specifically provide that your son will receive the house on your death, AND you make sure to put the house in title in the name of the trust, no probate will be necessary.

I do want to correct three of your comments. First, you asked whether the trust "prevents" probate. I would prefer to say that a properly created trust avoids probate.

But, please note that I said "a properly created trust." Just because you have spent the time and money to create a trust does not automatically mean that probate will not be necessary. Many people do not understand that you have to make sure that after you have a trust, you have to put the property into the trust; that means that you have to have a deed prepared and recorded from your name to the name of the trustee of the trust. A trust cannot hold property; only a trustee of the trust can do this.

So, in our example, if you have other assets (a car, a pension fund, etc.) and they are not put into the trust, probate will still be necessary for those other assets.

Second, you asked whether your son could get the deed into his name without charge. There will be some governmental transfer and/or recordation charges that the county/city will impose in order to record the deed. They should be fairly nominal.

Third, you said that the property would be "moved out of your name." Actually, that's not correct; the property will be moved out of your name when you transfer it to the trust.

I suggest you contact a local attorney to guide you through the process.

DEAR BENNY: I recently heard that the portion of one's monthly condo fees that go into a reserve fund for capital improvements to the overall property can be added to an individual condo unit's tax basis. Is this true?

We don't get detailed monthly bills from our association (most of us have our fees directly debited each month; the rest get undetailed vouchers to send with the money), but it is my understanding that the individual fees are based on our ownership percentage of the annual budget amount, which has a separate line item for the capital reserve fund replenishment.

Can we add that portion of our fees to our basis when we sell? This could actually make a difference for long-term single owners here, who could well exceed the $250,000 exclusion of gain depending on what market they sell into. --Abby

DEAR ABBY: Good question, so bear with me for a long response. Bottom line: There are some expenses that can be beneficial to you when you sell your condominium unit.

We need to start with some basic definitions: (1) gain -- also known as profit; this is the amount realized minus the adjusted basis of the home; (2) amount realized -- the selling price of your home minus your selling expenses; (3) basis -- this is the cost of your home, plus certain settlement expenses; (4) adjusted basis -- this is your basis increased or decreased by certain amounts. For example, if you have made major improvements to the house, the amount of those improvements increase your basis.

And clearly, in order to reduce your gain (and thus pay less capital gains tax) you want to legitimately increase both your basis and your selling expenses.

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