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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In a community association, each owner owns a percentage interest in the association. Your percentage interest can usually be found at the end of one of your legal documents, and is the number used to determine how much your annual assessment will be, as well as what percentage you have for voting purposes.

Over the years, your community association may have spent a considerable amount of money improving the property. They may have added a new roof to the community social room, put in a swimming pool, upgraded the "tot-lot" and made other similar improvements.

Let's assume that the association spent $500,000 in improvements from the time you bought your property and that your percentage interest is 1.5. If you multiply your percentage interest by the total improvements, you get $7,500, and this amount can properly be added to your basis.

Now, this may be academic for those who are eligible to claim the up-to-$500,000 (or $250,000) exclusion of gain. However, many homeowners have been fortunate to have made a lot of profit on their home over the years, and clearly every penny saved is welcomed.

Furthermore, many older homeowners took advantage of the old rollover (which was abolished back in 1997), and their newly purchased homes carried the basis of their older homes. This is confusing. If any of my readers bought their homes before 1997 and used the rollover, please see your tax accountant to assist you in determining your basis.

For more information, get a copy of IRS Publication 523, entitled "Selling Your Home". It is available free of charge online at www.irs.gov/publications.

DEAR BENNY: My mother just passed away (three daughters survive) and her condo is titled in the name of her living trust. One sister wants to purchase the condo. How should the sale be handled? Does the trust need its own tax ID? --Alma

DEAR ALMA: Your mother is called the "settlor" of the revocable living trust. Once the settlor dies, the trust becomes irrevocable and is a new tax entity, which requires a separate tax identification.

What instructions are in the trust document? The trustees must adhere to the wishes of the settlor who created the trust. Assuming that the sister has the right to purchase the condo (or if all of the named beneficiaries in the trust agree), the trustees of the trust will transfer title to the purchasing sister.

I do strongly recommend that you consult your own tax and legal advisers on this issue.

DEAR BENNY: My house is paid in full, and I want to add my sister's name to the title/deed. Please advise what I need to do. --Daisy

DEAR DAISY: There are two parts to my answer: (1) how to do this and (2) should you do this?

Legally, it's really a no-brainer. Get a lawyer to draw up a deed to your sister, and have the deed recorded among the land records in your area. But the question is, should you really should do it?

I have written about this many times; when you give a gift (i.e., put the sister on title for no money) the basis for tax purposes of the giver of the gift becomes the sister's tax basis.

What does this mean? Unless the sister will live in the house and take advantage of the up-to-$250,000 (or $500,000) exclusion of gain, if your sister sells the property, she could be hit with a large capital gain tax.

On the other hand, if you die and your sister inherits the property, she takes advantage of what is known as the "stepped-up" basis. This means that when you die, your sister's tax basis is the value of the property on the date of your death.

That can save your sister a lot of money that would otherwise go to the IRS.

Please talk with a financial adviser before you do the deed.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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