Real Estate Matters: Financial Questions and Answers - August 22, 2009
By Ilyce Glink

Q: Ilyce, I believe the dollar amount is $12,000 that a parent can give a child annually (tax free). If the parent chooses to give the child 20 acres of land, is he free to price the land at $600 per acre, in order to avoid going over this amount?

A: The amount that one individual can give to another without triggering the gift tax in 2009 is $13,000. The IRS Web site (www.IRS.gov) has a page of frequently asked questions on this topic. You can find it by typing the words "gift tax" in the search field.

The bigger question is the pricing of the parcel of land. If you owned the Mona Lisa, could you give it a value of $13,000 so that you could give it to your children and avoid the gift tax? I don't think the IRS would look very kindly on that.

In the same way, you may have to provide an appraisal or other valuation that would be acceptable to the IRS for the property in case the IRS audits you or looks into the gift of land.

If property is valued in the neighborhood from between $500 to $1000 per acre, you may be able to price the property at $600 per acre. But if land in the area is selling for $10,000 per acre, it would be suspect to price it at $600, because it would look to the IRS as though you were trying to give away something at a greater value.

The question you have to answer is what is your intent with the gift? If you want to give your child a parcel of land on which to build a house, you can structure the gift over time to allow you to fit within the $13,000 yearly limit. If you are hoping to divest your estate of assets, there are far better ways of gifting this land, including flat-out inheriting it or using one of several kinds of trusts.

You may wish to spend some time with a qualified estate planning attorney who can help you figure out what your bottom line intentions are with the gift -- and help you make the gift (if that's what the best solution is) in accordance with IRS rules.

Q: My father owns a house free and clear that has been vacant for the past three years. I've paid the taxes on his house for the past three years. Due to minor medical issues he currently lives a house that I own. He wants to transfer his vacant house into my name.

My father doesn't have the financial resources or the motivation to make the many repairs needed to get the house ready to rent or sell. In fact, he just wants to be done with it. He's on a fixed income and can't afford to keep up the insurance and taxes.

What's the best way to go about accomplishing this? Should we use a quitclaim deed or a warranty deed? Should I buy the house for a nominal fee? I'm not sure which way to proceed.

A: There are several ways your father can transfer ownership of the property to you. He can sell the property to you, he can just give you the property, or he can put the property into a trust and name you the beneficiary.

From a tax standpoint, you may have a problem if your father just gives you the property, transferring his ownership interests to you via quitclaim deed or any other type of deed. You will receive the property at his cost basis, possibly setting you up for an expensive tax bill down the line.

Likewise, if you purchase the property for a low price, you may also have a higher tax bill.

But if your father puts the property into a trust and names you the beneficiary, you will inherit the property at its current market value on the date of your father's death. If you turn around and sell the property, you likely wouldn't owe much, if anything, in taxes.

As the beneficiary of the trust, you could pay the expenses of the property, as well as the upkeep and insurance. You may also be able to rent out the property.

Then, when your dad passes away, you'll inherit the property and be able to minimize or eliminate taxes you pay on the sale.

If your father bought the home some time ago but the value of the home now is about the same, you may not have any federal income tax issues transferring the property from his name to you. But you may have other issues. In some states, the local real estate tax board can reevaluate the real estate taxes on the home and the taxes could go up considerably even if the value of the home hasn't increased. You may also have costs involved in transferring the property from his name to your name.

But if you decide to go forward and transfer title of the home from his name to your name, you could use a quitclaim deed or even a warranty deed. In some states you shouldn't use a quitclaim deed as they are frowned upon. For practical purposes, the only difference between a quitclaim deed and a warranty deed is that the seller in a quitclaim deed does not represent to own a particular piece of property. If the seller owns it, great, otherwise the buyer gets whatever interest the seller has in that piece of property.

In contract to a quitclaim deed, a seller using a warranty deed actually represents that he owns the property and will protect the buyer's ownership interest should one of the seller's representations under the deed end up being untrue. If the seller ends up not owning a property, the buyer can sue the seller for the breach of representations in the warranty deed. You can't sue a seller using a quitclaim deed in this manner.

As there has been quite a bit of fraud in recent years, some local municipalities and title companies no longer recognize the validity of quitclaim deeds. They would prefer to see a warranty deed or any other deed other than a quitclaim deed. And there are other types of deeds depending on the state and the type of transaction.

Please consult with an estate attorney on the best way to proceed.

Q: I am a first time homebuyer and signed a contract with a real estate agent. She showed us a few houses and then showed us one that I found on the Internet.

It turns out that the Realtor owns the property I found on the Internet. She bought a foreclosure and is now selling it.

We looked at a few more houses with her and she kept asking us if we had ruled hers out or not. My husband decided that, of the 10 houses we had seen, he really liked hers.

So we went through the manager of the brokerage to write the contract, and it turns out she wouldn't negotiate at all on price. So we did not buy the house.

Now things feel weird between us, and I don't know how to get out of the buyer's agent contract. It seems like a conflict of interest to me that she would have shown us her house and then also be the agent. Is there any way to get out of the buyer's contract since I have already stressed my feelings to the manager?

I have heard that you can get another broker as long as you do not buy a house that the first broker showed you. Is there any truth to that?

A: After the scenario you describe, I'd be surprised if it didn't feel weird to work with the agent.

You do not have to purchase a home your agent is listing. It can be a huge conflict of interest, and in this case she was not only trying to collect both sides of the commission, she was also the seller. In a situation like this, it is going to be difficult for an agent to step back from the emotional precipice all home sellers stand on as they wait for an offer.

The appropriate thing to do is to allow another agent (either in the agent's office or someone else you select) to represent you on the purchase of the property. That happened. But now your agent is unable to step back into professional role as agent and represent you effectively. If you feel funny, she probably does as well.

So what do you do now? I don't know if you signed a contract for a buyer's representative or if you're referring to the agency disclosure agreement that most brokers require agents and buyers or sellers to sign. You should carefully read whatever paperwork you've signed and try to figure out what it says about canceling the agreement or whether the agreement is with the brokerage company and not with the individual real estate agent.

Even a buyer's representation contract should have an exit clause. Even if yours doesn't, it will elapse in time. If you're stuck in the contract for awhile, you should ask the real estate firm's managing broker to let you out of it or to assign you a different real estate agent. Whether you have signed a representation agreement or not, you should let the agent know you've decided to work with someone else and that you will do so as soon as possible.

Then go find another agent who you feel has your best interests at heart -- and who is not trying to push their own property onto you.

Q: My wife and I have been in our current home for seven years. I am listed as the sole owner. If we buy a new home and put it in my wife's name only, would we qualify for the first time home buyer's credit?

A: I've received several e-mails from readers asking about various relationships and who might qualify for the $8,000 tax credit.

Current IRS tax law defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase. If a buyer is married, the law looks at the homeownership history of both spouses.

In your case, even though your wife isn't on title, neither of you qualifies for the $8,000 first-time buyer tax credit. If your state offers a general home buyer credit, you might qualify for that.

Unmarried purchasers, such as a parent and child or unmarried partners, where one of the buyers has owned a property but the other has not, may allocate up to $4,000 each of the credit amount to the first-time buyer. My understanding is that the $8,000 total amount runs with the house, not the individual. So a single first-time buyer would qualify for a tax credit of up to $8,000. Two first-time buyers purchasing the same property would qualify for a total of up to $4,000 each, or up to $8,000 for the single property.

For those home buyers who own a vacation property or a rental property, but not a primary residence, the law considers you to be first-time buyers as well.

Ilyce R. Glink's latest book is "100 Questions Every First-Time Home Buyer Should Ask: With Answers from Top Brokers from Around the Country" If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce's Web site, www.thinkglink.com.)

 

 

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Ilyce R. Glink's latest ebooks are "Save Your House From Foreclosure" and "The Clutter Collector: How to Get Rid of Clutter Everywhere In Your House," which are available at her Web site, www.thinkglink.com. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 am-1 pm EST. You can also write to Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022

 

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