ABOUT REAL ESTATE : Family Ties No Bar to Lease-Back
QUESTION: My wife (age 64) and I (age 70) own our home free and clear. We would like to use the concept of reverse mortgaging to get an income from our house.
But instead of going to a mortgage company, we approached one of our three sons with the possibility that he and his brothers would buy our house by paying us monthly installments. When he checked with his accountant, he was told that because it was a family arrangement, no tax benefits of any kind could be taken. How do you feel about this kind of arrangement? Is there any way of doing this so that each of us can benefit?
ANSWER: Your son’s accountant is being a little rigid. Simply because it’s an inter-family arrangement doesn’t matter to the Internal Revenue Service as long as the transaction is strictly a business deal with no “sweetheart” clauses.
If you make a straight sale of the property to your son (with you and your wife taking the once-in-a-lifetime exclusion of capital gains up to a maximum of $125,000) then, of course, the tax advantages are limited to the exclusion. But this has nothing to do with family. They’re the same limitations that any unrelated buyer and seller must live with.
The most common way for parents and children to enter into a reverse annuity agreement is through a sale/lease-back/annuity program. You’ll need a lawyer with some experience in this to make the arrangement for you.
Under this arrangement, the child buys the home from the parents and the parents retain possession of the home by leasing it back from the child. With the proceeds, the parents buy an outright annuity, which gives them a monthly income for life. The rental that the parents pay has to be at fair market value, but there’s quite a bit of leeway here.
The home now becomes a piece of income-producing property for the child with all of the deductions--taxes, depreciation, insurance, maintenance and management fees--associated with such ownership. The rental income, of course, is fully taxable.
Bankruptcy Limits Ability to Buy Home
Q: I am a retired, disabled Vietnam-era veteran. I had a shoe business and was losing so much money that my ex-wife and I filed for bankruptcy this past May.
I have never used my VA entitlement and have never bought a house. I would like to buy a house early next year, but I am too embarrassed to ask a broker about it. I heard that I have a good chance of assuming a loan, but I couldn’t buy a new house for several years. How can I go about this? I will have about $3,000 for a down payment.
A: It’s not going to be easy. Normally, the assumable VA-loan route is your most practical approach. Unfortunately, the VA has been stuck with so many foreclosed properties that HUD has become far more critical of the credit history of would-be buyers than it ever was. I can’t see them approving you with such a fresh bankruptcy.
Your best and perhaps only bet is to find a seller who has either had no luck selling his home conventionally, or who would rather finance it himself as an investment. He’s going to want to see your credit record and you’re going to have to be pretty convincing.
Best Bet on Time Share: Try to Sell It Yourself
Q: I have recently read stories warning owners of time-share properties to beware of “resale” firms. They told of many gimmicks and rip-offs. My problem is that I have relocated from Texas to Ohio and no longer can use my time-share on the beach in Texas. This has been paid in full. We still pay monthly dues. Can you tell me the best way to market this? I have run expensive ads with little response.
A: It’s a jungle out there, all right. You pay your up-front money to a “resale” firm and it’s money down the old drain. Most time-share owners, even when they succeed in selling, do so at about one-third the price they paid.
About the only thing I can suggest is that you keep advertising in papers within an easy commute of your time-share, mark the price down attractively and cross your fingers. You could, of course, simply walk away from it. Since it’s fully paid for, it isn’t likely to reflect unfavorably on your credit report but, of course, your entire investment is down the tubes.
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Key Word in Over-55 Deduction Is Three
Q: We need to know if we qualify for the exclusion from our gross $125,000 of gain on the sale of our principal home. We are both over 55 and have never taken the exclusion. We have owned, and lived in the home for over three years and it is now on the market for sale. IRS Publication 523 keeps referring to “during the five-year period. . . .” This is the problem: Do we have to own it five years? We have owned it only three.
A: Relax. You’re in fine shape. The IRS simply says that you are entitled to the exclusion if you have lived in your principal residence “three out of the past five years.” Three is the key word. The IRS doesn’t care if you lived in a piano box those previous two years. You’ve lived in your home three years and that’s all that counts.
Don’t Go Against Tide of Area Development
Q: About 10 years ago, a shopping center was built across the street from our house and an office building was built next door to us. We have had calls or letters from real estate people, a financial investor and individuals asking if we are interested in selling our house and land.
We have a low-interest mortgage (6%) and owe about $6,000, so we are not too interested in selling unless it is to our advantage. Our monthly payments are comfortable and we have no desire for a new, hefty mortgage. We realize that our property has good commercial value, but we don’t want to be taken advantage of. How can we obtain information on commercial real estate values?
A: You know, of course, that nine out of 10 people would love to be in your shoes.
Shop around for a highly regarded real estate firm that specializes in commercial property (it’s a whole different ballgame from residential real estate) and let them get the best price they can for your property--one that will enable you to buy into a true residential setting with enough of a down payment to bring the payments down to a comfortable level and still leave you with enough left over to invest. Don’t try to sweep back the tide--your neighborhood, as you remember it, is gone.
Home Sale Qualifies for Tax Exclusion
Q: My 80-year-old mother in the Midwest will need to sell her home soon because she is unable to live alone. Since she’s lived there for 38 years she certainly qualifies for the one-time exclusion from capital gains.
The trouble is that years ago she also put my name on the deed in case she could no longer manage her affairs. Will this present a problem since I am not qualified for the exclusion? Should I deed the house back to her?
A: No problem. It’s common occurrence with the IRS--a convenience between parent and child--and since you’ve never paid anything into the house, the information return will simply list your mother’s Social Security number as the owner of record.
