DEAR BENNY: I am considering paying off the second loan for my daughter on her house. Are there any tax consequences for either of us? –Anita
DEAR ANITA: Currently, under federal law, you have the right to gift your daughter (or anyone for that matter) up to $12,000 annually without filing a gift tax return or paying tax. If your daughter is married, you can also gift up to $12,000 to your son-in-law. And if you are married, you and your husband can each give up to $12,000 to the daughter and son-in-law for a total of $48,000 gift tax-free.
The gift in any amount is tax-free to your daughter. However, should you gift her more than the $12,000, there are gift tax implications for you. You will not have to pay any federal tax for this extra gift — as long as your total lifetime gifts have not yet exceeded $1 million, but you will have to file a gift tax return and it may impact on your estate when you die. This is rather complicated and you should consult your own tax advisors regarding your specific needs.
But let me ask you a question. What is the rate of that second loan? If it is really low — say in the 6 percent range — have you considered putting that money in a secured investment instead of paying off the mortgage? Currently, assuming that your daughter’s second loan is recorded among the land records in the state where the property is located, she does get some tax benefits by deducting the mortgage interest.
Once again, you should do the numbers. Does it make sense to pay off her second loan or would you — and your daughter — be better off by just investing that money elsewhere?
DEAR BENNY: We own 10 rental properties, but the rent does not cover our expenses. Two properties are condos, but the rest are very nice single-family homes in good condition and good locations. Here in Florida, it is not a good time to sell, but we can no longer keep up the $9,500-a-month deficit. Should we dump them and lose all of our down payment and equity or should we borrow and hang on? –Cathy
DEAR CATHY: Many years ago, I had a client in similar circumstances. I suggested that he consider selling one or two of the properties — even at a loss — so that he would start having positive cash flow. He refused to follow my advice, and has now lost all of his properties.
Obviously, I cannot predict the future of the Florida real estate market, but historically, real estate has been like a roller-coaster: Some years it goes up, and some years it goes down.
Why would you want to dump all of those properties? Why not consider selling off one or two, and then your debt service would be reduced. Furthermore, since you say you have equity, when you sell a couple of your investments, you should have some extra cash — even after paying any capital gains tax.
On the other hand, if you have any properties that would generate a loss, perhaps you should consider selling them first, so that you can take the appropriate tax loss when you file your income tax return next year.
DEAR BENNY: My 89-year-old aunt added my name on the deed to her home so it would not go to the state when she died. She has never married and has no children. I have now been told that her name is no longer on the deed. Apparently, I am now the sole owner. My aunt would like to move to an elder community and would qualify, as she does not own her home. She has other nieces and nephews and would like the money split between all of us. What are the ramifications of the capital gains tax, which I will have to pay on a home that is free and clear and worth about $100,000? How long of a time period before all of the taxes will come due? –Melanie
DEAR MELANIE: Your situation is exactly the reason I have been preaching for years that parents (or aunts, in your case) should not always give their property away without first understanding all consequences. I know that many readers will argue that by doing so, the aunt now can qualify for certain types of housing — presumably paid for by the government — which otherwise would not be available to her.
That may not necessarily be the case, and all I can say is that you and your aunt should have carefully reviewed all of the tax — and financial — ramifications before she put you on title. It may very well be that your aunt will still not qualify for the benefits she seeks if the house was transferred within the “lookback” the government uses to determine eligibility for various government assistance programs. Depending on the laws in your aunt’s state and when the house was transferred to you, your aunt may still be considered to own a house, and thus making her ineligible for the benefits she seeks.
As for your income tax consequences, the tax basis of a person giving a gift becomes the tax basis of the giftee. So if your aunt purchased the property for $50,000 and did not add any improvements, her basis shifts to you. So if you were to sell the house today for $100,000, you will have made a $50,000 profit. Let’s ignore real estate commissions and other closing costs that will reduce your tax liability. In this example, you will have to pay the IRS 15 percent of your profit, or $7,500. You may also have to pay state income tax.
This tax must be paid when you file your next income tax return.
Then, should you decide to honor your aunt’s wishes to distribute the net sales proceeds to her other relatives, this will also be considered a gift by you. While you will not have to pay any gift tax, there may be consequences for your estate upon your death.
You really must talk with a real estate tax attorney as soon as possible. You also want to be absolutely certain that your aunt has been removed from title before taking any other action.
DEAR BENNY: We just sold our condo in Florida and my wife’s brother-in-law was our “pseudo” Realtor. How much do we give him as a commission? The sale price was $180K. We were thinking $3K. Please help. –Chris
DEAR CHRIS: Interesting question. I assume he is not a licensed real estate agent or broker. Technically, he is not entitled to a real estate commission. But since he is part of the family, you can give him any amount you want. This would not be a commission but rather a gift in appreciation for his services.
DEAR BENNY: I bought a home with my mother as joint tenants in common with right of survivorship several years ago. I have been paying the mortgage. Recently she gave my brother a quitclaim deed for her portion since he has been living with her. Is this legal? The home is in South Carolina. –James
DEAR JAMES: There are three ways in which title can be held: (1) sole owner; (2) tenants in common — here, two or more people own property together. (Although usually when there are two people involved, title is held 50-50, it can also be held in unequal percentages. In the event that one of the tenants in common dies, his or her interest must be probated, and will be distributed according to the terms of any last will and testament. If there is no will, your state law spells out who will inherit that interest); and (3) joint tenants with right of survivorship. Here, two people own the property equally. On the death of one of the owners, the surviving joint tenant automatically gets full title to the property. No probate is needed. I do understand that some states are now allowing unequal percentages in a joint tenant arrangement.
How was title held? Your question was confusing because you mixed up two of the three title arrangements. But for this question, I will assume title was held as joint tenants with survivor rights. The specific answer to your question is that any joint tenant has the unilateral right to sever (break) the tenancy by conveying a deed to a third party — in this case your brother, and now you both hold title as tenants in common.
If he is not paying his share of the mortgage, you should consult your attorney to determine what rights you have in the state of South Carolina.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.