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

[barkley]

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.

there are some exclusions on this for sales to one's children. I think it's prop 58. it allows a child purchasing a parent's home to choose to either use the current appraised value under prop 13 rules OR their parent's basis. depending on the value of the home at transfer it sometimes works better for the new owner to take their own prop 13 basis (especially if parent's home went down in value and they never applied to get it lowered/taxes lowered).

had a friend who purchased a home from his dad who had owned it since the 60's-home was valued hundreds of thousands more than dad purchased it for. friend took advantage of the parent to child sale law such that he saved tens of thousands in taxes over the years he owned it.

 

[KKB]

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.

Your lender was somewhat mistatken...

Any one person is entitled to give $14K/yr. to anyone they want every year, tax free

ADDITIONALLY, any one person can give $5.34M over a lifetime to anyone they want, tax free. So theoretically I could give someone $5.34M now plus $14K/yr as long as I am alive, tax free. (or spread that $5.34M over any length, as long as I am alive)

Since most states will view the difference in value as a "gift", it easily falls under the lifetime amount, after deducting the $14K for this year.

As previously stated, unless their estate is well over $5M, there is little to worry about regarding estate taxes.

 

[eeyoresmom]

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.

Friend and her husband still owe $100, 000 on the house. They want to sell it to DD for that amount even though its valued around $250, 000.

 

[clutter]

Friend and her husband still owe $100, 000 on the house. They want to sell it to DD for that amount even though its valued around $250, 000.

All of the above is generally what your friend needs to consider.

1. It is not an arms length transaction. So the difference between the value and the price is reportable, and might create a tax liability, to the IRS and likely the state. If real estate taxes are based on transaction price, not assessments, there is probably something to compensate for that. Indeed, when closing on the house, there is always the possibility that any transaction fees based on purchase price might be adjusted to value.

2. Assuming that the dd will be obtaining her own financing.

3. Medicare/Medicaid issues. If your friend draws on benefits in the next 5 years, they will want to be able to access that $150,000.

They can sell the house to their dd for whatever price they want. However, they need to be aware of the ramifications of doing so. They really needs to consult an estate planning attorney. They generally are pretty good with these sorts of transactions.

 

[NewRVLady]

I thought Medicaid allowed the well spouse to keep a certain amount of cash, one vehicle and one home.
If the long term I'll spouse needs care?
They won't force the well Spouse to be homeless

 

[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.

This does bring up a good point. With proper estate planning, and long term care insurance, Medicaid may never be an issue.

 

[jls886]

The best advice you've received is to talk to an estate planning attorney above anyone else. Do not take advice from an internet chat board. Not that people here don't have expertise, but it takes a lot more information than what you posted to be able to answer a question like that. And then there are still little ins and outs depending on your and your parents' unique situations. There are a lot of tax and Medicaid implications that can come into play for your parents down the road, like a lot of people have mentioned. Don't risk something like that. Talk to an estate planning attorney. And in my personal opinion, I would tell you to talk to someone who specializes in only estate planning and elder law. They know their stuff.

 

[eeyoresmom]

I showed her this thread as the only thing I know for sure is that it is not straightforward, at least not in Massachusetts. Thanks everyone.

 

[barkley]

I thought Medicaid allowed the well spouse to keep a certain amount of cash, one vehicle and one home.
If the long term I'll spouse needs care?
They won't force the well Spouse to be homeless

in the case of the op the friend's parents won't be keeping their home but selling it to their dd. if a Medicaid application came up within the 5 year look back period then 'yes' if they owned a home that was their primary residence it might be exempted but a home they sold to their daughter for well below fair market value would not be (nor the amount well below fair market value she was gifted by her parents). Medicaid looks at these situations b/c they are often ways people try to shelter assets from consideration.

 

[Mickeyluver37]

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.

This is how ours worked as well. Keep in mind, this is relatively newer construction, they had a mortgage, and we were taking a mortgage. They are also not even retired. So this is different than gifting a family home that has been paid off for 50 years. The sales price to anyone that looks up the sale on our property shows that we actually paid market value. But the difference between the sale price and the mortgage- essentially our down payment- was all gifted.

 

[Anthony1971]

My neighbors went through this a few years ago with a lot of questions raised here.
They purchased the house at Market value and that is what the Mortgage was for. In the contract the seller was to give a large sum of money back after closing for X reasons like repair of. This shows the house was sold for the market but there were repairs to the house that were needed. This will not work unless it is with in reason.. but it is easy to come up with 50K-75K or more of repairs on a house that is not maintained.... Buyer agrees to pay all closing costs as return of cash... buyer agrees to pay rent for x amounts of months as they can only relocate on this date... There are always ways around huge gifts.

 

[DVCcurious]

I'm a CPA. I can only discuss the specific "if they sell the house for 100k to the kids what would happen" from a federal tax standpoint.

The tax laws you'd have to worry about are only estate taxes. Anybody can give anybody else a trillion dollars if they wanted. However each person is limited to how much they can give to someone else before paying the estate tax. That amount is above $3 million per person. So if the giftees total assets are less than $6 million there is nothing to worry about.

They would fill out a form and file it with the IRS. The form would have their SSNs and the amount of the gift (market value - what they are paid). The IRS would file this away and when these people die the IRS will say "They can give away $6 million - the value of the house they already gave away".

So for pretty much all middle class people they can give anyone whatever they want, file a form with the IRS, and nothing will happen. The 14k is the amount you can give without filing a form, but for the vast majority of us you can give your entire net worth and the only result will be you filing a form to the IRS and nobody will pay a dime in taxes.