Newlyweds With Two Homes

Q: My fiancé and I both own our own homes. He plans on selling his to one of his adult children as part of their inheritance before we marry and then move in with me. He wants to know the best way to go about this to avoid paying taxes.
 

We then plan on refinancing my house to be in both our names. I have two children also, but they are only teenagers.

A: If your fiancé is currently living in his home, he can sell it and take up to $250,000 in profits tax free. He should hire an attorney to assist him in preparing the documentation for the sale to his child, who will then be able to get conventional financing from a local lender for the purchase.

If his profits on the property exceed $250,000, the profits would be taxed at up to 15 percent plus state tax.

But there are some bigger issues that you need to work on before you and he move ahead with this plan.

First, you need to be very careful about simply adding your fiancé’s name to the deed. Depending on how much equity you have in the property, simply adding his name could be construed by the IRS as giving him a gift of half of the equity. While you can give anyone a gift of $12,000 in a single year, you don't want to trigger a taxable event with the IRS. However, if you marry you should not have any problem on adding his name to the title to the home. Your accountant can provide more details.

Finally, since you are considering gifting half of your equity to your spouse, is he going to give half of the profits he makes when he sells his house to you? What is going to happen to that cash?

You and he each have children from a prior relationship. If you put your property into your fiancé’s name, perhaps as joint tenants with rights of survivorship, and something happens to you, he will inherit your house. There may be nothing that protects your children or the inheritance you would want them to have. They could wind up with nothing – losing you and their home.

Until they are grown, you need to figure out a way to provide them enough financial resources should you die. That could mean buying life insurance, putting the house into a trust in which they are the named beneficiaries, and making sure your retirement accounts list them as the primary beneficiaries.

You might even need to reconsider whether your fiancé’s name should be on the title to the home. When you merge two families and each of you have children, you may need to determine how you want your assets to be split up in case something should happen to either of you.

You should consider speaking to an estate attorney in order to make sure that your teenage children are protected in case something happens to you or to your relationship with your fiancé. If you have considerable assets, you may also want to have an attorney prepare a pre-nuptial agreement or a living trust for some or all of your assets.

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