Q: My daughter wants to purchase a new home, and I want to help her with the financing. She currently owns the home she is in free and clear .
Due to the down housing market, she wants to buy another property but not necessarily sell her home right away. Her plan is to borrow money from me until the housing market improves, at which time she will sell her current property.
My question is this, can I place a lien (almost like a mortgage) on her current property so that when she sells it down the road the loan is paid back to me? She feels that the reason for this legal approach is to avoid getting hit with capital gains taxes when she sells. In effect, she wants to roll over the income from the current property into the new property a few years later but with my help.
Does this make sense?
A: We’re not sure what you or your daughter proposes makes sense. If you are lending money to your daughter, you can give her a loan and you can have your daughter give you a mortgage on both the new property she is buying and the property she currently owns. That way, if she sells either property, you have security knowing that your loan will either paid off in full or at least partly paid off depending on the circumstances.
If your daughter owns the home she now lives in and has lived in the property as her primary residence for two out of the last five years before she sells, she won’t have to pay federal income taxes on $250,000 of gains on the sale of the home ($500,000 if she is married).
If that’s the case, your daughter is mistaken in thinking of the sale of her home on a "roll over" basis. Many years ago, there was a roll over replacement rule that permitted a home owner to sell a property and not pay any federal income taxes on the sale of that home if the buyer replaced that primary residence with a home of equal or higher value.
You should talk to a real estate attorney to help protect your interests in the loan you are about to give your daughter. That attorney can help draft the mortgages and make sure that you that your interests are protected.
If your daughter does well in the sale of her existing home, she will be able to pay off all, or part of, your loan at that time. When the loan is paid off in full, you can release the lien (mortgage) that you placed on one or both of the homes.
Keep in mind that the current real estate market is under great stress. You don’t want to be in a position where you give your daughter a loan and then have her be unable to pay you off. You also don’t want to just hand over the cash without any legal documents that show exactly what are the terms of the loan.
Nov. 18, 2008.