How to transfer house and mortgage from my dad to me and my sibling?
June 6, 2017 7:47 PM   Subscribe

My sibling and I are currently renting a house from our father. He wants to give us the equity in the house and have us take over the mortgage. What is the best way to do this?

More info:
*This is in the U.S, in California, and we want to do this within the next year.
*My sibling and I both live in the house (my dad doesn't).
*The house is worth around $475,000-500,000.
*The remaining balance on the mortgage is somewhere around $260,000.
*My sibling and I have credit scores around 700 and 740 and gross annual incomes of around $65,000 and $40,000. Neither of us has any savings currently but we could divert money from paying off debt to savings for a while if we need to.

*How should we do this? Should he sell it to us at a reduced price (the amount of the mortgage rather than the market value)? Or something else?
*What are the taxes and other expenses or fees involved?
*What kind of professional help do we need and what is the first step?
*Any other advice?
posted by day late to Work & Money (13 answers total) 2 users marked this as a favorite
You have $100k combined income. How much debt do each of you have?
posted by zippy at 8:23 PM on June 6, 2017 [1 favorite]

Best answer: If you buy from him, your property taxes will go up; maybe a lot.

Any less you pay than fair market value is probably considered a gift and may or may not be taxed, so you should talk to an accountant. That's the first person you need to hire. You'll eventually need to get a mortgage, but you won't know of how much until you talk to the accountant.
posted by flimflam at 8:29 PM on June 6, 2017 [4 favorites]

Best answer: According to CA a family transfer of a primary residence is excluded from reassessment in CA as is a non-primary home (this one) of $1M or less.
posted by zippy at 8:40 PM on June 6, 2017 [4 favorites]

Best answer: You will probably want to start with a lawyer, first to advise you on how to organize this and then to draw up the paperwork. You will probably need to get an appraisal - the mortgage company will insist on it and probably demand that they choose the appraiser. The lawyer can also advise you on whether you might want to a written agreement with your brother concerning the co-owenership and what terms and conditions you might want to consider. (For example, how much does each contribute to the mortgage, other home expenses, repairs and improvements? what if one person can't afford their share? what if one person wants to move out or sell or sublet their room?)

IANAL, IANAE (I am not an expert) but my understanding is that if you structure this right, your tax basis will be protected on Prop 13. The difference between the amount you paying your father (to pay off the mortgage) and the current value would be a gift from him to you. It would impact his life-long gift and estate tax exemption but I don't think any $ would be due right away and maybe never. (Your lawyer would know that)

There would be bunch of fees due on closing the sale, the mortgage companies usually gives an estimate of these when you apply.

If your father is elderly and might need to go on Medicaid or Medi-Cal, (low income and running out of money, especially if he needs a nursing home) there is a look back period where asset transfers with x years of the application get included in his assets - very complicated but you should just be aware of that in case your father is (or might be in that situation).
posted by metahawk at 9:05 PM on June 6, 2017 [3 favorites]

Response by poster: Thanks for the answers so far.

My debt is 13,000 (car loan and credit card), my siblings is around 25,000 (student loan and credit card).
posted by day late at 10:10 PM on June 6, 2017

You can't buy a house without a reserve fund for expenses. You just can't. You HAVE to anticipate at least one major repair having to be made within the first year. "We just won't pay our other debt" is not a reserve fund.

You need to put this off for a little while. I'm assuming you are already paying your dad rent anyway, so he should be able to keep up on the mortgage until your financial house is a little more in order.
posted by praemunire at 11:40 PM on June 6, 2017 [5 favorites]

Best answer: How sure is it that you and your sibling will want to live together in this location for a long time? Even if you can somehow afford the payments on a quarter-million-dollar loan and the maintenance, taxes and insurance on a half-million-dollar house, which seems very iffy, a joint mortgage is a lot harder to get out of than a rental agreement. Especially so when neither party can afford to buy out the other. Have you identified one or more plausible exit plans?
posted by jon1270 at 4:18 AM on June 7, 2017 [1 favorite]

Best answer: FHA mortgages are assumable, first question is: is the mortgage FHA or conventional?
posted by rabbitrabbit at 5:41 AM on June 7, 2017

Response by poster: Sorry I won't keep replying, just want to respond to a couple of things.

It's not an FHA loan.

My dad doesn't need to do this immediately, he's in very good shape financially and retirement wise, and this isn't currently costing him anything (we're paying rent, equal to the current mortgage amount and taxes and paying for the random plumbing, etc. issues that come up, which still overall averages out to less than rental market value). However he recently retired and is moving to another country next year and we all want to do this before then.

What would be a reasonable amount to have saved in case of a larger problem coming up?

Also to be clear, we are both paying much more than the minimum payments on debt. I didn't mean that that we would not pay other debt, but that we would pay the minimum amounts for a while and put the difference towards savings.
posted by day late at 7:09 AM on June 7, 2017

Best answer: I think this is a pretty good article on home maintenance costs. If there's anything you can anticipate needing maintenance within the next 5 years, budget for that happening earlier than later. I think that if there's nothing major foreseeable (roof, furnace, etc.), then I would feel comfortable with $5,000 initial savings (and make sure to keep building the savings). Caveat: I am not a home owner - but I am looking to be one soon and reading up. So this is not first-hand experience talking.

Assuming you and your sibling have decent rates on the school and auto loans, I think it makes sense to drop back to minimum payments on those and keep paying more than minimum on the credit card debt.
posted by Kriesa at 9:08 AM on June 7, 2017

Best answer: If you buy from him, your property taxes will go up; maybe a lot.


You should not be buying the house from your parent; what you are looking for is a parent to child transfer, under which, the property taxes will remain the same. There is no cost to transfer ownership of the property, it's a form that your father would fill out and submit to your local county Assessor. Call them up and speak to the ownership division if you have questions, they are very helpful.

HOWEVER, simply transferring ownership from parent to children is not what you want to do. You want to go into property ownership with your exit strategy in place in case one of you no longer wants to own this property. For that reason, you really need to speak to a real estate attorney to first determine the best way for you and your sibling to hold title, so that the property taxes won't go up in the future (we are assuming for the purposes of this question that Prop 13 will not go away).

After that, you need to speak to a mortgage professional about obtaining a loan under your, your siblings', or both of your names, depending on what is easiest/cheapest to get and how you plan to hold title. I agree that it would be easiest to transfer the existing mortgage, and your father should call his bank or review his mortgage contract to see if that is possible.

I want to caution you, as a person who inherited a house at a very young age, think very carefully about what your exit strategy will be. What if you want to take a job in another city? What if your sibling does? What if one of you wants a bf/gf to move in? What if one of you can't stand the bf/gf? What if one of you wants to sell and the other doesn't? What if neither one of you wants to live there, but neither one of you wants to sell; who will manage the property?

Various anecdata time: I kind of feel like I got stuck in my city because of the house I inherited, rather than taking various jobs around the country and exploring my options a bit. In a similar situation, my cousins inherited a house that two wanted to sell and one didn't, and they couldn't force her out. So now she lives there and pays the mortgage, and her siblings are reaping the benefit of the appreciation of the house based on the money she is paying in, without contributing to it financially in any way themselves. Because of the way they structured the ownership, when it eventually gets sold it will be a three-way split, with no consideration given to the amount of money she put in. I have another friend who was put on the title to her mother's house via parent to child transfer, with the understanding that the house was really a gift for all five siblings. But after the fact some of the siblings got antsy about not being on the title and forced an ownership change to have their names added to the title, and guess what happened? The property taxes went from about $800/yr to $6000/yr.

Bottom line, don't do anything at all until you've talked to an attorney and a mortgage professional, so that you have a full picture of what you are getting into.
posted by vignettist at 9:42 AM on June 7, 2017 [6 favorites]

Consider your father just selling the house and gifting the proceeds.
posted by friendofstone at 1:06 PM on June 7, 2017

I can speak to the issue of taxes.

The worst-case scenario is probably where your father sells the house and gifts you the proceeds. Assuming that he hasn't lived there for at least two of the last five years, he can't take the (federal and state) $250,000 exemption on profits. Then his profit (what he sells the house for, minus selling costs, minus what he paid to purchase it, minus any capital improvements) is subject to both federal and California income taxes, which will be roughly 25% of the profit. (The exact percentage depends on what other income he reports on his income tax form; it could be as high as 32.5%.)

If your father gifts you the house, then he owes no gift tax (though he'll have to file a form with his tax return; the gift reduces how much you can inherit, tax-free, when he dies - that's currently more than $5 million, so the impact isn't very much). And there is no tax on the person who receives the gift (you).

However, if your father gifts you the house, then his basis (defined as his cost to purchase the house, plus capital improvements) becomes your basis. That's critical because when you sell the house, your profit [you've seen this before] is the selling price, minus selling costs, minus your basis. [If you make capital improvements, your basis will be higher than your father's basis.] An example might help: Let's say that your father bought the house for $225,000, and made $25,000 in improvements. Then his basis is $250,000. You inherit that; let's say you make $50,000 of capital improvements. Now your basis is $300,000. You sell the house for $900,000. Your profit, potentially taxable, is $600,000.

Contrast this with the situation where you inherit the house upon your father's death. In that case, your basis is the fair market value (FMV) at the time of your father's death. Suppose the house has increased in value to $800,000 by that point, and you sell it, eventually, for $900,000, net of selling costs. Then your profit, potentially taxable, is only $100,000; if you've lived in the house for two of the five years prior to its sale, you qualify for the $250,000 personal exemption and none of the $100,000 profit is taxable.
posted by WestCoaster at 10:10 PM on June 7, 2017 [1 favorite]

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