When transferring home ownership, be aware of the tax implications that could cost you a lot of money.
Q: My brother wants to transfer ownership of his home into my name and I need to know what the tax implications are for him and me if we do this. He received a settlement from his previous employer for getting hurt on the job and bought this house about a year and a half ago. He paid cash for it so there is no mortgage on it.
My brother paid about $150,000 for the house. His health has continued to decline and he is currently unable to work. He wants to transfer the home into my name before any creditors place liens on the property. Is this a good or bad idea?
A: We’re sorry to hear about your brother’s condition, but the plan that you outline is fraught with problems that could come back to haunt you both. Frankly, the tax implications are the least of it.
If your brother owes money to creditors, they may have a right to come after his assets. By transferring his house to you, he may be trying to avoid having his house seized and sold to pay off the creditors. The thinking is that if the property belongs to you, then he will protect it and you’ll allow him to continue living there without charge.
The problem with this plan is the intent. If your brother’s intent is to avoid paying money he owes by transferring an asset out of his possession, he may not be successful in keeping the home out of his creditors’ hands. The transfer of the home to you without your paying him for it could be construed as a fraudulent transfer of assets. In bankruptcy or in state court, the creditors could attempt to void the transfer to you. Depending on the state and the type of court action, creditors may have up to two years to go after property that may have been given away.
If the creditors attempt to get the property back in the course of any litigation, you might be forced to give the property back to your brother or his estate, to settle his debts. If the court decides you have been complicit in shielding these assets from creditors, you might end up with serious legal issues of your own and may also incur substantial legal expenses defending yourself.
You don’t want anyone accusing you of a fraudulent transfer. That has legal liability written all over it.
There are potential tax issues as well: If your brother gives you the property, you receive the home – for federal income tax purposes – at the price your brother paid for it two years ago. If the property has or does increases in value and you sell it, you’ll owe capital gains taxes on the difference between the cost basis (the price at which the property was given to you plus any structural changes made to the property plus any costs of purchase or sale) and the sales price.
If you allow your brother to live there, and he is paying rent, then the property becomes a rental property and you are required by the IRS to take depreciation. When you sell the property, you’ll have to recapture the depreciation at a rate of 25 percent (or whatever the rate becomes in the future). You’ll also be required to make real estate property tax payments.
What can you do? If your brother’s real financial troubles are in the future (as opposed to some minor difficulties today), then perhaps you have a two-year window in which he can complete the transfer to you and there won’t be a problem with creditors. You and he should sit with an estate attorney and discuss his options. One of these options could be to transfer the property into a trust, naming you and your brother as beneficiaries. The estate attorney may have other options for you to consider once he reviews your brother’s financial situation, his family life and his health issues
In any case, what you need now is legal advice. Start with a good estate attorney and work with your brother to resolve these issues.
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