Expert: Dick Dennis - 9/27/2008

Question
QUESTION: My wife and I are deeding over a rental house to my daughter and her husband.  The residence will be a GIFT.  There is a mortgage on the house of $123,700 (which balance they will assume), with about $100,000 worth of equity in the house (which represents the gifted portion). The mortage is currently with Countrywide, which operates an assumption department that allows me to "sell" the property to my daughter and her husband via an assumable mortgage, rather than having them apply for a new conventional mortgage at a higher rate.

I am not at all sure about which kind of deed form to use -- quit claim or warranty deed, or some other deed form entirely.

I am also uncertain what language/details should be included
in the deed.  Should I note that the transfer if a gift?  And what dollar figure do I indicate, if any, since there is a balance owed on the mortgage of $123,700, which they are assuming?

The house is a 1032 Exchange property.  Must this fact be noted somewhere on the deed?

I am not going through a title company because I don't need title insurance (the existing mortgage is already covered by a title insurance policy dating from when my wife and I bought the house).  

Any guidance you can render will be grdatly appreciated.

thank you.


ANSWER: If you are choosing to deed over a 1031 exchange property to your daughter, be aware that you are allowed to deed only $12,000 per year per person as far as the IRS is concerned, Tony. That means you may deed over to them $48,000 to daughter and husband in any one year ($12,000 for you to your daughter and husband=$24,000; $12,000 for your wife to your daughter and husband=$24,000).

With $100,000 your estimate equity, you are therefore giving over $52,000 in equity that IS TAXABLE.

I would recommend you consult with a CPA or a real-estate-wise tax expert to make sure you are doing it right.

If you were to carry back a $52,000 2nd mortgage which you would "neglect" to collect on and then gift them each $48,000 for the next year, then that would be possible. However, then that would not be a tax-free gift because it would entail selling them the property.

If you sell them the property for $52,000 less on your equity, that would take care of your problem, but that could create a different one. Since I do not know your personal financial history, I would recommend you REALLY see that CPA or tax expert. If this is done right, the most it should cost you is the CPA's fees.

If you choose to deed the property over as a gift, then you may use a quit-claim deed. Or you may use a Warranty deed (Grant Deed in some states) can be used. I'll bet you didn't think giving something away would be so complicated, did you? I wish you well.

Dick Dennis        dick@dickdennis.com

---------- FOLLOW-UP ----------

QUESTION: Mr. Dennis:
I've since googled around the real estate world and discovered that I can go beyond the $12,000 annual exclusion rule, and file a gift tax return using the $2,000,000 lifetime exclusion rule to draw upon, and by doing so can wipe away the $52,000 of remaining equity in the house in one fell swoop.

I'm really surprised you didn't know that -- it's plastered all over the place, with any number of CPAs and tax accountants offering gift tax information on the subject.

Thanks for getting me started, anyway.

Regards/Tony

Answer
Like I said, Tony, I didn't know your financial, or your plans for the future, but I would have told you about the lifetime exclusion. I am glad you chose that route to solve your problem. Glad you got started with the RIGHT way by going to CPAs.

Dick Dennis