Evaluating all of the elements that apply to making a financial gift to grown children before you make any decisions is critical. This week, we look at a couple looking to transfer a home to their son while minimizing the tax implications.
The situation
Terry, 68, and Joan, 66, have two grown children, Nick in Los Angeles and Josh in Highlands Ranch. In 2012, Terry and Joan purchased a home in Highlands Ranch for Josh, his wife, and their daughter to live in. Josh owned a condo in Lakewood and was unable to qualify for another mortgage to buy the family-style home until he sold the condo.
Terry and Joan made the decision to purchase the home and allow their son and daughter-in-law to pay the monthly mortgage payment until they were able to sell their condo. The plan was to transfer the mortgage to the young couple once they were free and clear of the other property.
Josh and his wife sold the condo six months ago and after repairs, the sale was a wash, with no profit for the couple. Terry and Joan wrote in to What’s The Plan to get some clarity on the process for transferring the mortgage to their son with hopes of avoiding actually having to sell the property to him. They decided to gift the couple the down payment that was used to purchase the house, no strings attached, because, Josh chose to go to an in-state school for college, while their other son went to a more expensive out-of-state school. Terry and Joan felt that this gift closed the gap in what they gave each sibling.
Recommendations
Purchasing and gifting the down payment is an extremely generous gift that I know Josh and his wife are thankful for. Unfortunately, there is not much wiggle room when it comes to transferring ownership. The mortgage agreement prevents changing the borrower or owner and requires Terry and Joan to physically sell the home to Josh.
The best situation would be if Josh and his wife were able to qualify for their own mortgage loan. I do not recommend cosigning if it is avoidable. Terry and Joan have helped their kids, and now it is healthy for them to be independent and protect their retirement from any default by Terry and Joan. Fortunately, the family does not need to enlist the help of a realtor because the buyer, seller and the house itself have already been found.
However, there is no way around the title fee and appraisal costs involved with the sale. I recommend Terry and Joan contact their mortgage broker to facilitate the sale and possibly a real estate attorney. (I also recommend they avoid online mortgage brokers to prevent ongoing solicitations from different companies.)
The kids will get their own mortgage and the home will be sold to them with a minimum of expenses. And until it goes through, Josh and his wife will also be able to use the mortgage interest as a write-off on their taxes.
I empathize with wanting to help their grown kids get set up in life. Terry and Joan have done that now. I encourage Terry and Joan to make this their last big gift, so they can protect their own financial independence and never have to move in with their kids.
Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do — e-mail whatstheplan @consistentvalues.com to get advice.
Names and identifying information are changed to protect confidentiality, and there’s no charge to be featured in the column.
