Q: My friend has power of attorney over her grandmother’s estate.
Her grandmother is in a nursing home with no chance of returning to her own home. My friend wants to use the equity in the house to fix it up and rent it out. Because my friend’s credit is not good, she wants to transfer the deed to my name to get the loan and make the repairs.
What is the best way to do this to avoid capital gains tax?
A: First of all, the property is in your friend’s grandmother’s name. Your friend’s credit may not have anything to do with the financing of the property. Your friend may wish to talk to a mortgage broker or lender that specializes in loans to senior citizens.
The grandmother may qualify for some sort of financing that would allow some of the equity to be withdrawn from the home and used to get it in shape to sell.
I don’t think it would be wise to transfer title from the grandmother to you, as you are not part of this family. If you obtain title to the home and get a mortgage to pay for it, but your friend has possession of the home, you will still be responsible for the payments on the home.
If title is transferred to you, and you get a home equity loan with the understanding that your friend will make the payments, and if you friend fails to make a mortgage payment, your credit could be hurt. Your friend’s credit is bad for a reason and you should not place yourself in a position to harm your credit.
The best advice for your friend is to find a way to obtain financing for the home using either her credit or her grandmother’s credit.
As far as capital gains are concerned, if you are buying the home, your friend’s grandmother will not have to pay taxes on $250,000 of the gain on the sale of the home, provided she lived in the home for two out of the last five years.
If her gain is more than $250,000, then the rest of her gains would be taxed at the long-term capital gains rate of up to 15 percent.
In any case, the smart thing for your friend to do now is to work with an estate planner or accountant. She may need advice on whether the taxes will be less if the home is kept in the family until the death of her grandmother or whether selling now is a better option.
Selling the home now could also affect any benefits she is receiving while she is in her nursing home. An elder law specialist may offer some good advice for her as well.
Finally, your friend has been given a position of enormous trust and responsibility. You should encourage her to speak to well-qualified experts so that she does what is best for her grandmother.
March 2, 2006.