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Author: beb252 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Parents house Date: 6/15/2001 12:18 PM
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I apologize if this is a common question. I did a serach and came up empty.

I don't know if I've been handed a problem or not...

Last year, on the advice of someone (attorney, estate planner, whatever), my parents decided to sell me their house for $1 and include the provision in their deed that they can continue to live there for the rest of their lives. I believe this was an attempt to avoid losing the home from their estate if they need to go into a nursing home. (My Dad often gets on a rant about how people who rent lose nothing, but people who own a home lose it to the state.)

I have no idea if this was a good thing for them to do, but I wasn't consulted. The first I heard of it was when they handed me a copy of the deed. I don't remember signing anything last year, and if I did I didn't know or realize that this was what it was about.

Anyway, I see two things that I want to ask right off. Maybe there are a couple of hundred more I should be asking (and please tell me if that's so) but these occur to me now.

1) What happens when they eventually die. I have no plans to live in the house. I assume my cost basis for the house is $1, and if I sold it for, say, $150,000, that my profit would be $149,999. Do I pay taxes on that, and if so at what rate?

2) Since I supposedly own the house now, can I deduct the property taxes on my income tax? They don't itemize, and a retired CPA who's a neighbor says I can do so as long as I pay the taxes. Is he right?

Thanks for this and any other help you can give.

Bruce
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Author: euphoriant Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51834 of 121219
Subject: Re: Parents house Date: 6/15/2001 12:42 PM
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Since I supposedly own the house now, can I deduct the property taxes on my income tax? They don't itemize, and a retired CPA who's a neighbor says I can do so as long as I pay the taxes. Is he right?

Yes, as long as you can itemize.

I'm sorry, but I don't know the answer to your first question.

e


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Author: taxprof Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51836 of 121219
Subject: Re: Parents house Date: 6/15/2001 2:20 PM
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What happens when they eventually die. I have no plans to live in the house. I assume my cost basis for the house is $1, and if I sold it for, say, $150,000, that my profit would be $149,999. Do I pay taxes on that, and if so at what rate?

You are correct that your cost basis would be $1, but you can offset the sales price by any commissions, fees, etc. you pay to sell. You would have to pay taxes on the gain, because you didn't live there for at least 2 years before you sold. Most likely it would be capital gains tax. The rate would depend upon your marginal tax rate (what your salary income is taxed at.) However, if you live there for 2 years before you sell it, then you could avoid paying the taxes altogether.

Something you did not mention ... your parents should have incurred some gift tax on this transfer of property. So they should have filed a gift tax return. If they paid any gift tax, a portion of that can be added to your $1 basis. If they did file a gift tax return, your basis amount could change. See a tax professional and tell him or her that you had a part-gift / part-sale transaction. That should point him or her in the right direction.

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Author: beb252 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51839 of 121219
Subject: Re: Parents house Date: 6/15/2001 2:54 PM
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Thanks to all for the help. If there's anything else I should consider, definitely do, definitely not do, or if I should "duck and cover" from something, please let me know. I hate it when things like this come out of nowhere and ambush me. While I expect I should be properly grateful for the gift, I would feel more grateful if I had the opportunity to first make sure that it didn't screw up anything in my own planning.

Something you did not mention ... your parents should have incurred some gift tax on this transfer of property. So they should have filed a gift tax return. If they paid any gift tax, a portion of that can be added to your $1 basis. If they did file a gift tax return, your basis amount could change. See a tax professional and tell him or her that you had a part-gift / part-sale transaction. That should point him or her in the right direction.

Again, I have no idea -- my parents are not very finance-literate and if they got this idea from an attorney he may not have even mentioned that aspect to them. I'm sure they would not know on their own, as I did not. Please(!) bring up anything else I should know about. I would rather have had the opportunity to research this stuff before-the-fact than after. I did find the post below and wonder if this applies to me in any way. Do I need to worry about anything but the $1 "price"??? For that matter, I have always assumed that something was either a gift or a sale, but not both. I guess that doesn't have to be true, though I never thought about it before.

http://boards.fool.com/Message.asp?mid=15066668

Thanks!!!
Bruce



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Author: taxprof Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51845 of 121219
Subject: Re: Parents house Date: 6/15/2001 7:53 PM
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This type of transaction is what the IRS might consider a "sham". I don't know what state your parents are in, but there might be state law problems too. Problems also might arise when one of them dies.

Unless the house was worth only $1, then your parents sold you the house for less than its fair market value (FMV). A sale for less than FMV between related parties is treated as a part gift / part sale. I hope to God that your parents did not get this advice from an attorney, because IMHO he/she committed malpractice.

This transaction can create several tax nightmares for you and your parents. Your parents can have gift and estate tax problems. You will have income tax problems, because I am assuming that although they live there, they are not paying you any rent. Depending upon how the IRS chooses to view the transaction, your family could be in for one heck of a nightmare.

I caution you about relying on "free" advice on this board or any other place, because you cannot rely upon it when your transaction gets discovered by the IRS. But if you pay a professional for his/her advice you can rely on it and at least avoid the negligence penalty.

Good luck!

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Author: acm4tax Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51849 of 121219
Subject: Re: Parents house Date: 6/16/2001 12:26 AM
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I caution you about relying on "free" advice on this board or any other place, because you cannot rely upon it when your transaction gets discovered by the IRS. But if you pay a professional for his/her advice you can rely on it and at least avoid the negligence penalty.

Although you cannot use any advice on this board to minimize potential penalties, you can get a written response from IRS by asking your tax law question on their website: http://www.irs.ustreas.gov/help/newmail/user.html

Any written responses from them should be printed and saved with your paperwork for future use if necessary. This will support your claim that you relied on advice from IRS, hence no penalty if you are deemed to owe additional tax.

Personally, I would deem the transfer as a gift. As a gift, your basis will be their basis so you should ask them for their cost and the cost of all improvements they've made. I would also look into your state rules on medicare support for your parents if your name had just been added with their names on the property instead of removing their names.

If all three of your names had been put on the deed of record, then you'd be entitled to stepped up basis at the time of their death (tax law). Your state (each state has their own rules) could put a lien on the property for medicare support provided which would be settled when the property is sold (civil law). This might be less costly than the taxes that will due if you report a gain of everything except $1. If all three names had been put on the deed, then no gift tax return would be due.

Since there is a big difference between civil law and tax law regarding your parents' transfer of property to you, I'd address your question to IRS to get a written opinion first. Then you might check with a real estate attorney who could advise you about reversing any damage that might have been done by your parents' advisor.

I hope you follow up on this. It would be great if you'd post any results of your search on this board for the benefit of anyone else who finds themselves in a similar position.

Best wishes



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Author: beb252 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51853 of 121219
Subject: Re: Parents house Date: 6/16/2001 1:02 AM
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I hope to God that your parents did not get this advice from an attorney, because IMHO he/she committed malpractice.

Yes, the business card from the firm that did this says "Attorneys at Law".

I don't know what state your parents are in, but there might be state law problems too.

They live in Massachusetts. I live in NH. This seems to be a very common practice in Mass, so I assume it isn't against state law. I know of at least a dozen others who have done this in Mass using various different attorneys, not just the one they used.

This type of transaction is what the IRS might consider a "sham".

Actually, there was no intent to affect federal tax liability here, and I don't think it does (but what do I know). Only to shelter the property from potential future state medicare seizure, and to avoid tying the property up in probate when they die.

You will have income tax problems, because I am assuming that although they live there, they are not paying you any rent.

Please tell me more. There's obviously something here I don't understand. I've never looked into this stuff because I've never had any desire to own rental property. (Actually, I guess the truth is that I've never had any desire to MANAGE rental property.)

I caution you about relying on "free" advice on this board or any other place, because you cannot rely upon it when your transaction gets discovered by the IRS. But if you pay a professional for his/her advice you can rely on it and at least avoid the negligence penalty.

Absolutely! I'm just looking for a place to start understanding this. I'm not looking for free gospel advice, just hoping to avoid the first month or two of bouncing from office to office looking for the right people to talk to. And to walk in knowing enough that I can skip the first couple of expensive hours of learning the lingo and the basics.

Also, I don't know what bearing this may have on things, but they have owned and lived there since around 1971. In going through some other papers that were also given to me, I see that my parents have a quitclaim deed from a different attorney selling the property to them for $1 in the late 80s. It looks like this involved straightening boundary lines between this property and a neighbor. It appears the $1 sales must be a common thing in Mass. It sort of looks like it's common there for people to transfer property to an attorney who then causes legal stuff to happen and sells it back to the owners for $1. I don't pretend to understand this, but my parents lead a very simple life and are not wheelers and dealers. Their entire estate is probably not worth $200,000. They rely on attorneys they have known most of their lives who tell them what's the right way to do things (at least that's what they believe).

I am looking at the deed to me, and it appears to be a standard quitclaim deed, but with the added paragraph at the end stating "The grantors reserve to themselves and to the survivor of them a life estate in the granted premises." I'm not enough of a legal eagle to even know what that means, other than that it means I couldn't kick them out even if I wanted to, which is fine with me.


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Author: AncienGO One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51947 of 121219
Subject: Re: Parents house Date: 6/20/2001 12:38 PM
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The suggestion that "you will have income tax problems" refers to the the IRS standard assumption that there is no such thing as a free lunch. It's like an interest-free loan: the IRS assumes it doesn't exist, and you would be expected to treat the market-rate interest you *didn't* pay as income. When the loan comes from a relative, that phantom interest may be considered as a gift, but that further complicates matters. Maybe the loaner would have to pay a gift tax. (my head is starting to ache...)

It looks to me like the "income tax problems" would fall to your parents, who would incur additional income equal to a market rent rate -- which you could gift back to them if it's less than $10,000 per year -- possibly then incurring a tax on the phantom income yourself. (pounding...)

My suggestion is that you and your parents see the attorney who set this up and ask him/her these questions. They may even have a pre-typed information sheet (preferably on their corporate letterhead) with the answers if it's a standard Massachusetts thing. At least then you would have some recourse (against penalties, and possibly for malpractice) if this comes back to bite you.

Bob

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Author: beb252 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52080 of 121219
Subject: Re: Parents house Date: 6/25/2001 1:45 PM
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(my head is starting to ache...)
(pounding...)


I wish I could say, "Yes, I see!", but I'm not THAT naive where the IRS is concerned. But I do get the general idea.

My suggestion is that you and your parents see the attorney who set this up and ask him/her these questions.

Yes, I do plan to do that, but it's complicated by us not living close by and attorneys having an unexplainable aversion to working on weekends like the rest of us often have to. 8^) That will have to wait until I can have a day off with enough notice to schedule something, I'm afraid.

Thanks for the help!

Bruce



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Author: FoolStreet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 52525 of 121219
Subject: Re: Parents house Date: 7/12/2001 12:18 PM
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I had a similar question/similar situationand found a lot of answers on the "Buying a Home" board. Go there and you will be flooded with past posts about this kind of thing.



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