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We are considering buying a home with my daughter and her…

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We are considering buying...

We are considering buying a home with my daughter and her husband. My husband and I would put down a deposit and co-sign the mortgage. My daughter and her husband will make the mortgage payments and live in the house. What are the pros and cons of having my and my husband's name on the title and which type of tenancy, joint or in common, is best. My concern is if something were to happen to us I want them to own the house in full so they can sell it if they choose to.

Lawyer's Assistant: Because real estate law varies from place to place, can you tell me what state this is in?

New Jersey

Lawyer's Assistant: Has any paperwork been filed?

Not yet. We had a contract but the sellers terminated it. Now we're looking again.

Lawyer's Assistant: Anything else you want the lawyer to know before I connect you?

The reason we are helping them is that he just started his surgery practice so he has good potential but can't qualify now and they want to buy rather than rent for the year or two that it will take for him to qualify for his own mortgage. He took a substantial loan already to buy his practice.

Submitted: 11 months ago.Category: Real Estate Law
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9/14/2017
Real Estate Lawyer: legalgems, Arbitrator replied 11 months ago
legalgems
legalgems, Arbitrator
Category: Real Estate Law
Satisfied Customers: 13,958
Experience: Just Answer consultant at Self employed
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Hello! I will be reviewing your question and posting a response momentarily; if you have any follow up questions please respond here. Thanks!

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Real Estate Lawyer: legalgems, Arbitrator replied 11 months ago

Thank you for your question;

Often times parties will hold property as joint tenants with right of survivorship; this allows the last surviving party to be the full owner by operation of law (basically just a death certificate is filed with the county showing the death of a joint owner and then that vests title in the survivor).

The problem with joint ownership for parents/grown children is that of liability: if one of the parties is sued, the property can be attached via a court judgment. Other financial concerns is that if the parents are in need of nursing home care, the property can disqualify them for government assistance.

Another issue is estate planning. If a parent dies and leaves their property to their children (or anyone for that matter) the heir receives a stepped up basis for capital gains, so that any appreciation during the original owner's lifetime is essentially wiped out for tax purposes and that is a tax advantage that many people do not wish to lose.

Additionally, if the mortgage payment is lower than the fair rental value, the difference may be considered a gift, and can have other tax implications. If it is deemed a "personal use" rental then that is considered a second home for tax purposes and there are various tax implications depending on the use; please see:

https://www.irs.gov/publications/p527/ch05.html

As such many parents that are trying to help out a child will often consider other avenues such as gifting the annual allowed exemption ($14,000 per person per year, so each parent can give each child and in-law that amount without having to file gift tax returns) or by executing a promissory note and lending the money at the going market rate and registering it as a second mortgage on the property.

sample note here:

https://www.sec.gov/Archives/edgar/data/1297587/000119312511105236/dex1039.htm

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Customer reply replied 11 months ago
We would not be renting to them. They will be paying the bank mortgage directly. Nor would we be claiming any tax exemption. So how would this affect taxes?Also we will be paid back for our deposit but we don't want to charge them interest on a "second mortgage at the going rate". So we would just want to apply the deposit at closing and let them pay us back as they are able. My accountant said we would not have to pay a gift tax if we do that. Is he incorrect?
Thank you
Real Estate Lawyer: legalgems, Arbitrator replied 11 months ago

The problem is that if the house is jointly owned and one party lives in it to the exclusion of the other normally rent is paid (to compensate the co-owner) so the IRS may deem that is personal use and it may affect what one may deduct, and also whether the fair rental value is less than the annual gift tax exclusion.

Gift tax is not due and payable until the lifetime exclusion of $5.4 million is reached; however, if one person gives another more than $14,000 in one calendar year, they need to file a gift tax form #706 -https://www.irs.gov/businesses/small-businesses-and-self-employed/forms-and-publications-estate-and-gift-tax - that does not require payment of gift taxes but rather allows the IRS to keep track of lifetime gifts.

If relatives fail to charge the applicable federal rate (https://apps.irs.gov/app/picklist/list/federalRates.html) that can result in tax penalties - otherwise the IRS can "impute" an interest rate and charge penalties and interest from the date the taxes would have been due if properly reported.

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Real Estate Lawyer: legalgems, Arbitrator replied 11 months ago

**If only the children's name is ***** ***** deed, the first paragraph above does not apply - that is for co-ownership issues.

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Real Estate Lawyer: legalgems, Arbitrator replied 11 months ago

Hello again; just checking in to see how things worked out;

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