Q: I’ve lived in a house for 12 years that my father owns. He has said that I will inherit this property when he is deceased.
I’ve paid the mortgage, taxes, insurance and all improvements to the property for these last 12 years. But now I want to put the house in my name and in the name of my new wife, for her protection.
We’ve looked into quitclaim deeds, but we’re not sure of how this would affect our taxes. The existing mortgage is $170,000, and the property is now worth $350,000 to $400,000.
How should we determine the value? Should we buy it outright from my father or put the property into an irrevocable trust to guarantee no battles with my brother? I am at a loss and have never been that concerned with things like this.
A: I think you might want to buy the house from your father outright. Since you’ve paid the mortgage, taxes and insurance for the last twelve years, you’ll be able to afford the cost of the original mortgage at least.
I would talk to a real estate attorney about how to structure the deal. If your father gives you the property, he’ll have to report that to the IRS, and it will decrease the amount of his lifetime gift exemption.
My sense is that the best thing you can do it to buy it for the original cost your father paid, and refinance the loan for the existing amount of the mortgage. Then, you’ll own the property outright, and your brother won’t be an issue.
If your father wants to leave the cash you’ll pay him to your brother, which will be roughly half of what the property is worth, he can do it. You’ll have the existing equity in the property as your share of your father’s estate. If you sell the property, having owned it and lived in it for two years, you’ll be able to keep your profits tax-free up to $500,000 if you’re married, or $250,000 if you’re single.
You could also ask your father to transfer the property into a trust that would name you and your spouse as the beneficiaries when he passes away.
The benefit here is that you would inherit the property at its value on the day of his death, which might be $400,000. If you then live in the house and it appreciates further in value, you’ll be able to keep up to $500,000 of that profit tax free, or up to a sales price of around $900,000. (I’m excluding the costs of sale here, for simplicity’s sake.)
Creating an irrevocable trust would get this asset out of your father’s estate, and would leave you secure in the knowledge that his wish for you to have the property will be fulfilled. But unless your father also names your wife as a co-beneficiary, you could have problems if you unexpectedly die before your Dad. You’d have to be very careful in how the trust is drawn so that your brother does not inherit the property and leave your wife bereft.
(If you want to protect your wife financially, be sure to buy a term life insurance policy that is substantial enough to provide her with enough cash to pay the mortgage, taxes, and insurance on the property, as well as care for any children you and she may have together someday.)
In the interest of family unity, I do think you and your father, your brother and any other siblings (and your father’s wife, if he has one), should sit down and have a conversation so no one feels left out in the cold. Perhaps your father has other significant assets that he can leave directly to your brother to even things out. Or, perhaps your brother is far wealthier than you so he would want you to have this entire asset.
The worst thing would be if you and your brother severed your relationship over money, although I know it happens every day.
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