Can my friend sell her home to DD for less than its valued at?

[eeyoresmom]

My friend is 60 and her DH is 73. Their plan is to sell their house, valued at $250, 000, to their DD for whatever their mortgage is at that time. (Probably 2 years from now it will be around $100, 000) This is in Massachusetts. I am sure this isn't doable but don't know what tax liability they would each face or if DD could even get a mortgage in this scenario? Anyone know more or any advice?

 

[Mickeyluver37]

My friend is 60 and her DH is 73. Their plan is to sell their house, valued at $250, 000, to their DD for whatever their mortgage is at that time. (Probably 2 years from now it will be around $100, 000) This is in Massachusetts. I am sure this isn't doable but don't know what tax liability they would each face or if DD could even get a mortgage in this scenario? Anyone know more or any advice?

We were not looking at a difference between the value of the home and the mortgage being that large, but when we got our mortgage from our current house that we bought from my parents, the lender required a gift of equity letter. The total amount can only be $14,000 per person (for 2014), subject to IRS limitations. So my parents could gift DH and I equity of $56,000 total. The lender said we could also have equity gifted to the kids if needed to stay under the IRS limitations.

I'm sure this is much less complicated when there is NOT a mortgage involved.

 

[Gr8t Fan]

.

 

[RitaE]

As long as they pay off the home mortgage, they can do whatever they want with their house in terms of ownership.

There might be some Gift Tax implications, but unless they have assets valued into the millions of dollars, it's really just paperwork.

As for whether or not she can get a mortgage, that will depend on the type of loan and likely what income and assets she can show in addition to the parent's gifted equity. The lenders in particular are going to be concerned that the gift is truly a gift and not an under the table "home loan." Like, she's going to be making monthly payments to them in addition to her monthly mortgage payments.

FHA in particular from what I have seen has some restrictions on purchasing with gift assistance and low amounts of personal assets.

 

[Darcy03231]

Your friends should consult with an attorney who specializes in estate law and real estate law.

There's no problem with doing what they want to do, but there can be tax implications, as well as estate implications.

For instance, if your friend and/or her DH need to go into a nursing home, the equity they gifted to their daughter may come into play in a Medicare look back.

This is definitely an area where I would get the professionals involved.

 

[Sadie22]

Your friends would do well to consult an estate planning attorney who can guide them in planning for their continuing retirement years and long term care. The size of their estate or whether they are getting by on Social Security all factor into what is the best course of action for the parents, as well as their DD avoiding taxes on a gift of real estate made now versus being inherited. Only a Massachusetts attorney is going to be able to advise the family how to achieve their goals without creating more problems, and more expense, than they envisioned.

 

[RitaE]

We were not looking at a difference between the value of the home and the mortgage being that large, but when we got our mortgage from our current house that we bought from my parents, the lender required a gift of equity letter. The total amount can only be $14,000 per person (for 2014), subject to IRS limitations. So my parents could gift DH and I equity of $56,000 total. The lender said we could also have equity gifted to the kids if needed to stay under the IRS limitations.

I'm sure this is much less complicated when there is NOT a mortgage involved.

That $14k limitation is a per year limit that people can give other people without involving the IRS.

After the gift exceeds that limit it gets a little more complicated and the gifted amounts start going against the lifetime unified credit. But even still, unless the parents have assets well into the millions of dollars, there is no Gift Tax liability. It's just keeping track of the paperwork.

 

[Minnesota!]

My mom sold us her house for far less than the value of it. All we had to do is see a real estate lawyer and have paperwork drawn up. A few hundred $$ for paperwork and all was good.

 

[tvguy]

You set the value of the house when you sell it. So that should be no issue as long as you sell it for more than they paid for it.

 

[eeyoresmom]

Really? So if my parents bought their house for $24, 000 they van sell it to me for say $25, 0000 even though the value of the home is now $330, 000?

 

[djmeredith]

My mom sold us her house for far less than the value of it. All we had to do is see a real estate lawyer and have paperwork drawn up. A few hundred $$ for paperwork and all was good.

This approach only covers the real estate transaction portion of the deal without taking into consideration possible unintended consequences. As others have said, there can be "hidden" long term consequences with these types of transactions. Medicaid long term care (nursing home) eligibility being a major one. Spend the money to consult an attorney who specializes in estate planning to avoid any possible negative consequences down the road.

 

[RitaE]

They can sell it to you for $1 as long as there isn't an outstanding unpaid mortgage attached to it.

It won't be valued at $1 for the property tax appraisal or anything like that, but if it is fully their house, they can sell it for however much they want.

Outside of keeping the bank happy and any sort of Medicaid look back issues as mentioned by a previous poster, there are no laws that say you aren't allowed to sell your house at a reduced value.

Now whether or not the buyers can qualify for a mortgage is a different process because of the Mortgage Underwriting Guidelines.

 

[barkley]

Really? So if my parents bought their house for $24, 000 they van sell it to me for say $25, 0000 even though the value of the home is now $330, 000?

oh they could-but there would be tax implications (gifts and the fair market value of the home), and it could bite the parents in the butt if they ever had a need to apply for Medicaid.


it is REALY worth the few hundred dollars a consultation with an elder law attorney (who SPECIALIZES in Medicaid laws for a particular state) costs. no one WANTS to have to apply for it, but a catastrophic event can trigger the need so that the non ill spouse can retain some assets to live on. I saw it time and again administering the program-poor planning (though well intentioned) that created ineligibility and no source of support for the healthier spouse

the irs is going to look to the fair market value of the home when it comes to gift tax issue, and while there's a pretty high ceiling these days for the life time exemption no one knows if that might change 10 or so years down the line (my experience is the irs tends to decrease or eliminate exemptions over time).

 

[kymom99]

This would be my understanding but I am by no means an expert. If they set the price at 100,000 the daughter would need to have a certain downpayment depending on the type of loan, etc. 80% is typically the downpayment amount to avoid PMI. Now if the parents were to set the sale price at 120,000 they could gift her the 20,000 downpayment and she could apply for a loan for 100,000. I bought my mom's house when she died. The sale price was 150,000. The estate gifted me 25,000 for most of the downpayment, which was my share of the equity in the house. I took a loan for 120,000, so I had to come up with the rest.

 

[tvguy]

They can sell it to you for $1 as long as there isn't an outstanding unpaid mortgage attached to it.

It won't be valued at $1 for the property tax appraisal or anything like that, but if it is fully their house, they can sell it for however much they want.

Outside of keeping the bank happy and any sort of Medicaid look back issues as mentioned by a previous poster, there are no laws that say you aren't allowed to sell your house at a reduced value.

Now whether or not the buyers can qualify for a mortgage is a different process because of the Mortgage Underwriting Guidelines.

i think that's where the original purchase price would be the issue. I'm in California and here property taxes are set at 1% of the sales price.

 

[tvguy]

it is REALY worth the few hundred dollars a consultation with an elder law attorney (who SPECIALIZES in Medicaid laws for a particular state) costs. no one WANTS to have to apply for it, but a catastrophic event can trigger the need so that the non ill spouse can retain some assets to live on.

Probably the best answer, or a real estate attorney. But I think restrictions only apply if you try and sell after the catastrophic event.

 

[djmeredith]

But I think restrictions only apply if you try and sell after the catastrophic event.

Incorrect. Medicaid has a 5 year look back period on most financial transactions when a person applies for long term care. When it comes to the transfer/sale of real estate there are some transactions that can affect a person's eligibility for many more years. That's what I meant by hidden or unintended future consequences.

 

[Jeff_G]

They can sell it to you for $1 as long as there isn't an outstanding unpaid mortgage attached to it.

You just have to understand that selling the house to a relative for under market value the IRS considers that you just make a gift for the difference between fair market value and what you sold it for. As other have said if the amount is over 14K this means you have to fill out the lifetime gift tax exclusion paperwork.

Again as many others have pointed out it would be best to involve a real estate or elder estate lawyer.

 

[tvguy]

Incorrect. Medicaid has a 5 year look back period on most financial transactions when a person applies for long term care. When it comes to the transfer/sale of real estate there are some transactions that can affect a person's eligibility for many more years. That's what I meant by hidden or unintended future consequences.

My only experience was where the property was being sold as part of the process of establishing eligibility. It doesn't surprise on the look back. My wife's aunt had a huge hassle getting Medicaid to to accept the sales price of her parents house......even though it was several thousand dollars MORE than any of the three appraisals of the properties value.

 

[barkley]

My only experience was where the property was being sold as part of the process of establishing eligibility. It doesn't surprise on the look back. My wife's aunt had a huge hassle getting Medicaid to to accept the sales price of her parents house......even though it was several thousand dollars MORE than any of the three appraisals of the properties value.

nope-look back applies to all sales/transfers, that's why it's important to do anything like this with the knowledge of a qualified Medicaid elder law attorney.

some states (like California-at least they were 10 years ago when I worked it) have it written into their administration guidelines that a person/couple can ask for a "presumptive eligibility determination". you basically see a worker who looks at your situation "today" and lets you know if you would be eligible should you apply (or what could be preventing eligibility). it can provide a snapshot into what type of financial planning down the line might be advisable.