Implications of parents giving me 2nd home vs. inheriting it.

[Fly4free]

I am wondering if anyone has any knowledge of the advantages/disadvantages of my parents giving me their vacation home now instead of waiting for me to inherit it.

They surprised me the other day by telling me they would like to just give it to me now. They are too old for the upkeep on it. I have been helping them with it when we go stay there anyhow. I had hoped to purchase it from them after I have my home paid off. I would hate for them to sell it. My father spent so many years building it.

I believe I read somewhere that if I would try to sell a home that was given to me I have $0 basis in it & would have to pay income tax on all proceeds, vs. inheriting it and only paying taxes on the difference of the price of the sale from the value when I inherited it.

I have children that will be heading to college in about 4&7 yrs. and I don't know how having more assets will affect financial aid either. TIA for any advice.

 

[disney1990]

You don't want them to give it to you -- you want to inherit it.

 

[Fly4free]

You don't want them to give it to you -- you want to inherit it.

Can you please explain to me why. I need to explain it to my parents as well. I thought thought it might not be a good idea.

 

[MrsPete]

My brother and I were concerned about a similar situation (land instead of a house), and we went to an accountant to ask about the financial /tax implications. We agreed that the advice we received was well worth what we paid.

For our circumstances, we agreed to begin paying the taxes and upkeep on the land now (relieving the older generation of that financial burden). No, this situation isn't completely problem-free, but we've all agreed to it.

As for financial aid, I don't think it's going to matter. If you buy the house from your parents, your assets'll be larger. If you don't buy the house, you'll have the money in the bank. Either way, if you earn enough to buy the house, you're not going to get financial aid. We're very middle-class, and I was surprised that our EFC (Estimated Family Contribution -- what we're expected to be prepared to pay each year) is 2Xs the cost of one year at her college.

 

[MrsPete]

Can you please explain to me why. I need to explain it to my parents as well. I thought thought it might not be a good idea.

Honestly, it's been 4-5 years since we talked to the accountant about the tax implications of buying /gifting /inheriting . . . and I remember that it had to do with the "base price", and the bottom line was that we'll pay significantly less in taxes if we inherit the land. However, admittedly, we have a number of odd twists and turns in our situation -- you really should get professional advice on this yourself.

As for how to explain it to them. Make an appointment to see a tax professional for advice together.

Another small detail that could be important: Clearly, preserving your parents' assets is important to you (and to them). Be sure they have long term care insurance. If either of them ever needs a nursing home, they might one day be forced between selling the house that they want to leave to you or foregoing the care that they need themselves. Insurance is the best way to guarantee that they won't have to make that decision.

Another thought on the financial aid aspect: If you take over the house now (regardless of whose name it's in), you might rent it out and save that money towards college tuition. That's more of a sure-thing than hoping for money from the government.

 

[Sadie22]

I believe I read somewhere that if I would try to sell a home that was given to me I have $0 basis in it & would have to pay income tax on all proceeds, vs. inheriting it and only paying taxes on the difference of the price of the sale from the value when I inherited it.

I have children that will be heading to college in about 4&7 yrs. and I don't know how having more assets will affect financial aid either. TIA for any advice.

You are right about the tax basis situation. Consult an estate planning attorney for more information regarding how each scenario affects your situation versus your parents' situation. An attorney can discuss options and scenarios that you have not considered. I recommend an attorney rather than an accountant. The attorney can bring in an accountant if necessary, but an EP attorney can talk about things like planning for your parents' long term care needs, documents to make sure their wishes can be carried out and so on so that everything goes as planned. An accountant is not able to do that.

I'm not sure how holding additional real estate might affect financial aid. Money in accounts other than retirement accounts makes a difference, although money in a child's name is counted with a greater percentage than money in parents' names. It is assumed that a greater percentage of a child's savings will be used for each year of college, in other words.

I suggest encouraging your children to get good grades, to participate in school and community activities, and to apply for as many merit-based scholarships as possible. They will likely find that more funding is available at private institutions than public ones.

 

[McKinneyMouse]

Be sure to consult an accountant. However, there might be some benefit in you buying the property from them for say $1.00 and have that put on the deed transfer.

 

[DebMcDonald]

The cost of owning a second house with no mortgage will greatly impact your sending a child to college. We're dealing with that now. We recently filled out our FAFSA and they consider that second home an asset so because of that we're not seeing any financial aid coming our way. We purchased this second home from my grandparents but they held the mortgage, so on paper it didn't look like we had one, so when it comes time to sell our financial advisor said to be prepared to put a good chuck of that money away for taxes.

 

[pickledmom]

everything will be fine in the end

 

[Colleen27]

The cost of owning a second house with no mortgage will greatly impact your sending a child to college. We're dealing with that now. We recently filled out our FAFSA and they consider that second home an asset so because of that we're not seeing any financial aid coming our way.

If it isn't TMI, would you mind sharing the value of the house and/or roughly what percentage of that asset the FAFSA determined to be available for college expenses? Is it treated like a bank account or is there a different formula?

We're considering buying the house next door to us, because in the current market and it's fair condition it would likely be cheaper to buy the property than to construct the garage we've been planning on adding to ours (it has a 2.5 car garage, and homes that size are selling in the 20-30K range in our town). The property would be jointly owned between my mother & I, which is ideal for property tax and other local ownership issues, but I hadn't even thought about the college funding implications.

 

[MrsPete]

You are right about the tax basis situation. Consult an estate planning attorney for more information regarding how each scenario affects your situation versus your parents' situation. An attorney can discuss options and scenarios that you have not considered. I recommend an attorney rather than an accountant. The attorney can bring in an accountant if necessary, but an EP attorney can talk about things like planning for your parents' long term care needs, documents to make sure their wishes can be carried out and so on so that everything goes as planned. An accountant is not able to do that.

Actually, we did see a real estate attorney and a CPA. In our case, the accountant was very, very helpful whereas the attorney . . . was not. The attorney did not inspire confidence in us, and we left questioning some of the things he'd said. Because we felt so unsure of his advice, we decided to go to the tax accountant. In contrast, the CPA gave us solid advice that fit with the things we already knew, and he brought up new tax implications of which we hadn't been aware. While they were fresh in my mind, I used the internet to double-check his facts and was able to prove him right. In all honesty, though, I must admit that I think the attorney to who we spoke was something of an idiot. I don't think he's representative of all real estate attorneys. And I think we happened upon a cracker-jack accountant; additionally, he told us that his mother had died a year before, leaving him farmland in a situation very much like our own -- so he had reason to know our needs backwards and forwards. I'd absolutely use him again in the future.

Maybe the real moral is, This is a big financial concern, and two opinions couldn't hurt.

 

[MrsPete]

Be sure to consult an accountant. However, there might be some benefit in you buying the property from them for say $1.00 and have that put on the deed transfer.

We investigated that possibility, and we found that it's possible to rent a piece of property from a living individual under this type of one-dollar deal, but the taxes'll get you if you try to buy it. The state isn't getting cheated out of fair market value taxes.

 

[Sadie22]

My advice to go to an estate planning attorney first is based on my education and experience working with them. I do not say to go to a mere real estate attorney. Not all attorneys have the same education and experience. Someone who specializes in estate planning can lay out the alternatives for you and your parents. Your parents ultimately make the decisions. The attorney can call in an accountant to discuss anything needed, but the attorney will be able to prepare necessary documents, in consultation with partners in other specialties if necessary, in order to accomplish the desired goals.

 

[lost*in*cyberspace]

everything will be fine in the end

I'm assuming this "advice" is to get your post count up and not to be taken seriously

OP - You and your parents definitely need to consult a financial planner or tax attorney before making any decisions.

 

[Cheshire Figment]

To put it very simply. There are two important numbers to look at.

One is the cost basis to your parents; what they paid for the house (including land) plus cost of major improvements. Note that an owners personal labor is not taken into consideration.

The other is the "Fair market value" which is the selling price between a purchaser and seller when neither is under a compunction to do the purchase/sale.

If they give you the house, your basis is the same as their basis, so any gain (or loss) on your selling it is based on their basis.

If you inherit it, the value to you for computing gain or loss on sale is the FMV at the date of death.

If the house has been in the faamily for many years the difference between their basis and the FMV is probably very high.

Mike (CPA Retired)

 

[Fly4free]

Thanks so much everyone for your advice. This is a much more complicated situation than meets the eye. I will def need to talk with a professional to make a final decision after being advised on all options.

After reading what Mike just wrote, it sounds like it would be advantageous to inherit the house. The house foundation was laid July 4, 1976 (the bicentennial). And the shell was put up by a builder. My parents put a lot of sweat equity into the home working every weekend over many years to finish the house. This equates to a lot of fond memories, but a low cost basis compared to it's current value.

At least now I can explain it to my parents, why we should wait on this. As long as DH and I can help maintain the house, we can hang on to it.

 

[Swimalie]

Thanks so much everyone for your advice. This is a much more complicated situation than meets the eye. I will def need to talk with a professional to make a final decision after being advised on all options.

After reading what Mike just wrote, it sounds like it would be advantageous to inherit the house. The house foundation was laid July 4, 1976 (the bicentennial). And the shell was put up by a builder. My parents put a lot of sweat equity into the home working every weekend over many years to finish the house. This equates to a lot of fond memories, but a low cost basis compared to it's current value.

At least now I can explain it to my parents, why we should wait on this. As long as DH and I can help maintain the house, we can hang on to it.

Waiting is the best option. And Mike got it right. My mother in law tried to gift us some stock instead of waiting until we inherited it. She wanted my husband to be in charge of the stock. If we had gone ahead with this, we would owe a lot more on taxes when we sell it rather than inherited it 20+ years later.

 

[tasha99]

I'm sure this doesn't apply here, but I'll share it anyway. One of the things I learned working for an estate planning /elder law attorney was never let your parents give you a house. We had more than one elder abuse case where things got messy because the parents needed the house back. We also had people come in with Medicaid issues because of the lookback period for assets. These wouldn't most likely be a problem if your parents are affluent enough to have had two houses, but I've seen property deals like that ruin family relationships, at least for poorer families.

 

[disney1990]

To put it very simply. There are two important numbers to look at.

One is the cost basis to your parents; what they paid for the house (including land) plus cost of major improvements. Note that an owners personal labor is not taken into consideration.

The other is the "Fair market value" which is the selling price between a purchaser and seller when neither is under a compunction to do the purchase/sale.

If they give you the house, your basis is the same as their basis, so any gain (or loss) on your selling it is based on their basis.

If you inherit it, the value to you for computing gain or loss on sale is the FMV at the date of death.

If the house has been in the faamily for many years the difference between their basis and the FMV is probably very high.

Mike (CPA Retired)

Thanks, I knew it was better to inherit it, but didn't know how to explain it.

Let's use some simple numbers. Let's say your parents paid $50,000 for the house and they give it to you now. You sell the house for $400,000. The tax basis is the difference between $400,000 and $50,000 ($350,000).

Now let's say your parents paid $50,000 for the house. They pass away and you inherit a house now worth $400,000. The tax basis (if you sell the house) for $400,000 is $0.00. Make sense?

 

[cluvsdisney]

I second (or third) the advice to speak with an estate planning attorney.

I have been sitting in on estate planning meetings lately and from what I understand...If your parents gift the house to you now, it will be excluded from their estate at their time of death. Estate tax is pretty steep and the value of the house at the time of death would be taxed.

If they give you the house now they would need to file a gift tax return and any value over the annual gift tax exclusions ($13,000 per person) goes against the lifetime gift tax exemption of $5 million (which can increase or decrease in the future). The current FMV of the house would be reported on the gift tax return which could be less than the FMV at the time of their death.

I have no idea if it's important for your parents to move assets around nor am I asking, but this would be a reason to give you the house now instead of later. I don't think you would incur additional income tax when you receive the house but you would pay tax on the gains using their original cost basis when you sell it as explained by Cheshire Figment. Like I said, it's best to talk to an estate attorney.