best way to transfer home to son

[user17524531726]

I bought a house in SD that I rent to my son as he kept getting priced out of rentals. He is a single Dad with 3 kids. This was before my husband and I moved to TN for his work. I am retired with just SS.  The rental income from the house covers the mortgage, insurance, taxes and improvements as it was in disrepair. I show a small loss each year after depreciation. My husband makes about $100,000. and is not on the deed of the house.

The goal is to transfer the house to my son. I purchased it for about $90,000 4-5 years ago. The current mortgage is about $56,000 @ 3.2%.  The current value is about $175,000 as it still needs work. My will shows he gets the house and there is a life insurance that would pay off the mortgage.  But we would like to transfer it sooner if we can find a way that doesn't hurt us on taxes.

Should I put the just the house in a Trust in SD with my son as the beneficiary? Sell it to him CFD at what he's currently paying for rent? I can't assign the mortgage. I/m concerned about how gift taxes, capital gains taxes, etc would affect both his taxes and me and my husbands taxes. 

What would you advise? Our CPA in SD retired and I was quoted about $450 to meet with his replacement to discuss this. We file through TurboTax now.  Thanks for your guidance!

[Bsch4477]

You have a very low interest rate on your mortgage and if he can afford the rent he pays you which takes care of your expenses and you get a tax loss on your rental you might want to keep the current arrangement. At your death he inherits the home tax free. 

[user17524531726]

Thank you. That is the current plan but we wanted to check other options just in case. 

[Opus 17]

You can't actually report a rental loss on your tax return unless you are renting at fair market rates.   Unless he pays rent at fair market rates (what you would charge a stranger to rent the same house in the same neighborhood in the same condition) there is not much financial advantage to renting.  

If you simply gift him the house by quitclaim deed, there are no taxes owed by you, unless your lifetime total of gifts is more than about $15 million.  You would have to file a form 709 gift tax return but no tax is owed.  He would also receive your cost basis (what you paid originally, plus what you and he have paid for permanent improvements.

The only concern I know of, is that if you require long term medical care and apply for Medicaid, Medicaid can claw back gifts made within the previous 5 years.  I'm sure there are other ramifications of giving him the house vs renting it to him at cost.

If you are renting at fair market rates, then it is probably slightly to your advantage to continue renting, unless you or he just want to put the house in his name to avoid entanglements.  

[pk]

@user17524531726  agreeing with the excellent reply from my colleague @Bsch4477 , I am just wondering why are you even considering the transfer now ?  Why the rush ?  Is there something else you are trying to achieve beyond your "Will" in the transfer of the asset to your son ?  Are you trying to get it out of your asset collection for other reason like "spending down" for medicare ?

Have you considered a "life estate" like mechanism   --- however that may have  ( depending on the exact circumstances and facts ) whether a step-up is available at your passing.  If that is what want to do, perhaps a discussion with an attorney is advisable.

[M-MTax]

I agree with @Bsch4477......... probably best to leave it as is since you have a will. Two things:

1) Any transfer from you to your son would involve drafting a deed, recording, etc. which may trigger the due on sale clause in your mortgage and, regardless, would involve the services of an attorney (so figure $1k as a floor, which is not worth it at these values).

2) With respect to your loss, I can only assume it is likely very, very small considering your son covers all of the expenses and the annual depreciation deduction is rather low (based on $90k, approximately $3272/yr). At those rates, the IRS is not likely to scrutinize your return, particularly since your "small loss" would be a passive loss. 

[Opus 17]

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@pk wrote:

@user17524531726  agreeing with the excellent reply from my colleague @Bsch4477 , I am just wondering why are you even considering the transfer now ?  Why the rush ?  Is there something else you are trying to achieve beyond your "Will" in the transfer of the asset to your son ?  Are you trying to get it out of your asset collection for other reason like "spending down" for medicare ?

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If you are trying to do long term financial planning for the possibility of an illness or need for extended medical care, I strongly advise you to consult with an elder law firm.  This will cost you some but be well worth it.  "Medicare" is not the issue, but Medicare will not pay for nursing home coverage.  Medicaid will cover a nursing home, but only if you are "poor" (roughly speaking).  You must spend your own funds first, and if you give away assets to make yourself "poor", you can run into serious trouble (as in, Medicaid won't pay for your coverage unless you get the gift back from the recipient and use it for medical expenses.)

I have no idea how a rental property would fit into the Medicaid rules (I know just a little about the rules for other assets like your own house where you live, car, and IRA, but nothing about rental property.). An elder law firm can create the right kind of deeds and asset protection trusts  to protect your assets so you can pass them on to your children without being forced to spend your estate down to the ground for medical care.  But you can't guess on this one.  The wrong move might cost your son his house.

[M-MTax]

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@Opus 17 wrote:
The wrong move might cost your son his house.

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Yeah, well, if that's the primary concern, then @user17524531726 should simply execute a QC deed from her to her son....easy, simple and straightforward.

The son is paying all of the expenses anyway and the gift would be the difference between the FMV of the house and the mortgage balance (i.e., nowhere near enough to trigger any gift tax). If the son then continues to use the home as his primary residence for 2 or more years, he'll be able to use the $250k capital gain exclusion (at least).

[Opus 17]

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@M-MTax wrote:

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@Opus 17 wrote:
The wrong move might cost your son his house.

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Yeah, well, if that's the primary concern, then @user17524531726 should simply execute a QC deed from her to her son....easy, simple and straightforward.

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I am not an elder care lawyer, but as it was explained to me (by an attorney when my parents did their estate planning), if the parents need to go on Medicaid, any large gifts made in the previous 5 years will affect Medicaid eligibility.  So even a simple quitclaim deed could cause a real problem, if the parents need long term medical care in the next 5 years.  Maybe they are perfectly healthy.  But that's why I would recommend a professional consultation.  

[M-MTax]

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@Opus 17 wrote:
.......if the parents need to go on Medicaid, any large gifts made in the previous 5 years will affect Medicaid eligibility.  So even a simple quitclaim deed could cause a real problem,

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Understood, which is why the transfer, depending upon the circumstances, might want to be done as soon as possible.

There is no acceptable solution for the scenario you described beyond getting past the 5-year claw back period or selling the property to the son at its FMV.

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@Opus 17 wrote:
Maybe they are perfectly healthy.  But that's why I would recommend a professional consultation.  

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Except @user17524531726 appeared to be balking at a $450 charge for a consultation with a CPA. Do you suppose a consultation with an elder law attorney would be less expensive and any work beyond that would run less than $500-$1k (and up)? There are people out there with limited assets for whom the result is not worth the fees involved and they have to choose a less costly route and hope for the best outcome.

[Opus 17]

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@M-MTax wrote:

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Except @user17524531726 appeared to be balking at a $450 charge for a consultation with a CPA. Do you suppose a consultation with an elder law attorney would be less expensive and any work beyond that would run less than $500-$1k (and up)? There are people out there with limited assets for whom the result is not worth the fees involved and they have to choose a less costly route and hope for the best outcome.

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Two points in response.

1. Spending $5,000 on an attorney so that your children can inherit a $175,000 house, plus whatever other assets you might have (investments, etc.) is an investment with a 3500% payoff.  Not my fault if that seems too extreme.

2. When I am at the edge of my own competency or beyond, I always try to recommend professional guidance.  No one here has all the answers, even a "champ" who is an estate planning attorney doesn't know this person's situation and can't offer legal advice, only suggestions.  

[M-MTax]

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@Opus 17 wrote:
1. Spending $5,000 on an attorney so that your children can inherit a $175,000 house...

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I'm not sure why you would think spending $5,000 is within the realm of possibility (or the willingness) of a taxpayer who owns a house worth $175,000 (with a mortgage of $56,000) and has only SS income plus a spouse with an income of circa $100,000 when there seems to be a reluctance to spend even $450 on a consultation with a CPA. Clearly, there is a disconnect between your thought process and the reality of this situation.

Moreover, there is no "3500% payoff" if either (a) the taxpayer here never does use some sort of "Medicaid program" to pay for long-term nursing care (beyond what is covered by Medicare) OR (b) the taxpayer executes a QC deed in short order, which would appear to have little to ZERO adverse consequences in this case. 

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@Opus 17 wrote:
2. When I am at the edge of my own competency or beyond, I always try to recommend professional guidance. 

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In that event, you should really stop answering questions such as the one posed by the OP in this thread. Answering questions based solely upon your own personal experience is less than ideal and typically misleading.