Q: I currently have title to a house that was gifted to me by my parents when I moved in with them about 2 years ago. They’re retired and collecting Social Security and welfare. I moved in to help support them and gifting the house was a good way to transfer the asset and related mortgage interest and property tax deductions to me.
Now, I’ve moved out and my sister and her family have moved in to help take care of my parents. They’re paying the mortgage and all related taxes and expenses. I’ve been renting and am about to enter into escrow for another property that will be my primary residence.
The family is thinking we should transfer the house my parents are living in to my sister so she and her husband can take advantage of the tax benefits. My current mortgage on the first house has a prepayment penalty clause of five years allowing 20 percent pay-downs per year but the prepayment penalty does not kick in if the property is sold.
What would be the best, most cost-effective method of getting the title and liability of the first house to my sister?
A: Your first step should be to talk to a reputable mortgage broker or mortgage lender and have them discuss the various options for your sister to finance the purchase of the home from you. Upon the purchase, your sister could obtain her own financing and the title could be transferred from you to her.
You should probably talk to a real estate attorney or a tax accountant to determine what your tax consequences will be if you sell the home to your sister. If you claim a profit on the sale, you may have to pay taxes on the profit. In some states you pay a tax on new mortgages that you obtain and that may be costly for your sister.
You will also want to ask the accountant if there are any lingering tax issues regarding the “gifting” of the property to you by your parents in the first place.
Transferring title of the property to your sister should be relatively easy. Just as when your parents transferred the title to the home to you, you will do the same with your sister. You, will, however, need to make sure that the prepayment penalty does not apply to a sale of your home. Frequently those prepayment penalties kick in at any time that the loan is paid off in full during a certain number of years.
Read the documents carefully or when you talk to an attorney have him or her review them with you.
Oct. 29, 2004.