Ginny: I read your article about quitclaim deeds and was impressed with the level of detail in it. My situation is a bit different, and I am looking for some advice on the route I should take to transfer my mother-in-law’s deed to my wife and me.
My mother-in-law purchased a home that we had thought about buying. She purchased it with cash, as we were in a predicament where the lenders couldn’t give us the loan in time before the home was foreclosed.
At the time she purchased the home for us, we overlooked adding our names to the deed. Since the closing, I’ve made arrangements for design approvals, permits, etc., to renovate the home, and we are now at the point of getting a construction loan for the project.
In order to get the loan, the deed has to have one of our names on it. We are looking to transfer the deed over from my mother-in-law to us without going into my mother-in-law’s lifetime exclusion and incurring tax liabilities for either one of us.
My friend told us that we can be added to the deed in equal percentages over time. We considered this, but to transfer ownership completely it would take about seven years of submitting a new deed with new percentages each year.
Our lawyer suggested transferring the home to my father-in-law first. Then we could take out a mortgage with my in-laws so they can forgive a portion of the loan each year.
I searched online to find answers and found that if that route was taken, my in-laws would need to recognize interest income using the applicable federal rates as a minimum. Is there a way to transfer the deed to us without diving into my in-law’s lifetime exclusion, and also limiting our tax liabilities? Peter B.
Peter: You’ve talked to an attorney, friend and read up online, but you still have questions. I wonder why that is, since Ie think you’ve received pretty good information so far and have been given good choices as to how to transfer the title to the two of you from your in-laws.
Your father-in-law can give you and your wife cash or property (including stocks) worth $28,000 each year without affecting his taxes in any meaningful way. Likewise, your mother-in-law can give the two of you $28,000 each year. That’s $56,000 per year of assets that can transfer without triggering a taxable event.
Assuming the home is worth $560,000, the transfer would take 10 years if you transferred 10 percent of the title from your in-laws to the two of you, assuming the $14,000 per person per year amount doesn’t change. If you purchase the home from your mother-in-law, she could forgive the same amounts in debt every year.
Now, your friend is correct that you must pay interest on the loan. But with interest rates as low as they are, the minimum required interest rate is quite low. The AFR (Applicable Federal Rates) is a good gauge for determining the minimum interest rate for your loan.
You can look up the rates online. They range from 0.64 percent for short-term loans to 2.92 percent for long-term loans. Given your situation and the enormous financial benefit that your in-laws are giving to you, these interest payments are small, relative to the overall deal you have with them.
Remember, however, that those interest rates fluctuate and your loan can be a floating (variable) or fixed interest rate for a certain number of years. However, the longer the term of the loan, the (slightly) higher the interest rate.
Your tax liabilities and your in-laws’ are minimal. You get to deduct the interest payments made on the loan from them, and they declare the interest payments as income on their end. Estate planning attorneys are quite good at structuring transactions like these.
You might want to consult with one. We don’t know if the attorney you talked to is an estate attorney. His advice was sound, but it may have been only one of many options provided to you.
Going forward, if the home is in your name and you need additional financing for the renovation, you might have trouble getting a loan from a bank. If your loan from your in-laws is for the whole value of the home, you may not have equity in the home to get another loan for any rehab work you’re planning on the home.