Ask Realty Times - November 26, 2004
by Peter G. Miller
Question: My sister asked me to purchase a house in Las Vegas before prices go any higher and then transfer the title to her after she sells her house in northern California. What tax and cost consequences am I looking at? Answer: What you propose would result in one closing for you to settle on the Las Vegas property and a second closing to transfer title to your sister. If you financed the sale, the property would have to be refinanced with a new owner. Two closings can be expensive by the time one is finished with all the fees, transfer taxes and charges. As to income taxes, there would be a tax on any profit made from the sale of the Las Vegas property. If the sale was made within a year of acquisition then preferential capital gains rates would not apply. Given a quick turn-around and little if any price increase, the actual amount of the tax would likely be minimal. As an alternative, if your sister has equity in her California home, perhaps she could get a "bridge" loan that could be used as a down payment for a Las Vegas property. Or, if you have cash for a downpayment, create a bridge loan for her secured by her current property -- when it sells the bridge loan will automatically end. Question: I own a couple rental properties and was told I should form a limited liability corporation (LLC) to protect my personal assets. My lawyer told me that my existing lenders would probably require me to refinance or pull the note due if they found out even though I'm the sole member of the LLC. No problem, I thought, until I found out that I would have to pay for commercial loans which typically carry much higher closing costs and a higher rate by approximately 2 percent. This is obviously a deterrent as it would take a big chunk of my cash flow. If the property isn't commercial real estate then why would they hit an LLC with a commercial rate? Answer: Given that the properties are intended to produce income and tax benefits, they are commercial real estate. Giving title to an LLC means that the property has a new owner -- it has effectively been "sold," thus the current loan is finished. As to the interest rate, lenders see more risk with corporations than with people. Question: I found things wrong with my home after closing. I had attorneys go after the inspector but they had no luck finding him. That was seven years ago and here I sit in a house that needs much work and no money to do it. Are there any options open to me? Answer: The time to resolve such matters was long ago, as a condition of closing when escrow (trust) accounts could have been established for any required repairs. Long ago, if appropriate, was also the time to file a claim against the inspector. Has the value of your property increased? If yes, perhaps get a home equity loan for repairs -- if such financing makes economic sense. Alternatively, speak with a real estate broker about selling the property "as is." Question: We put our home up for sale at a time when we were facing foreclosure. A buyer was quickly found, but the deal fell through just before closing because the purchaser lost his job. The broker then found a second buyer -- but now the purchase price had dropped about $35,000. The office manager cut the brokerage commission and said he felt so bad because this was right before school and I had already transferred my children's school records. He offered to give us $2,000 as a gift and $6,000 as a security deposit for our new apartment. He was giving this money to us with the intention that it would be paid back out of the closing money. So we agreed. At closing, we paid the commission plus $11,000 to a third party. What happened here? Answer: Real estate transactions should be transparent -- that is, you should know what was paid to whom, what you owe, what you're owed and why. If you have discomfort with your transaction, first speak with the broker. If unsatisfied, contact your state real estate commission and ask that they review the entire transaction, including the listing agreement, sale contract and all closing papers. A complete list of state real estate commissions and departments can be found at ARELLO.com. Question: I'm a first-time home buyer living in New York City, and looking for a residence in Brooklyn. I've noticed that house price limits for programs such as down-payment assistance and HUD-related items are significantly below what ANY type of property would cost in this high-priced market. I'm sure that other folks in Boston, San Francisco, Chicago and elsewhere have the same problem. Do most institutions (banks, financing companies, not-for-profit housing groups, etc.) use a national average to set amounts for loan limits, single and multiple-family dwellings down payment assistance etc.? Answer: You raise a good point, one which lenders have attempted to address. In the case of conforming loans, the current loan limit for a single-family home is $333,700. However, the single-family limit for properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands is 50 percent higher. With FHA financing, the "standard" mortgage limit is $160,176. For "high-cost" areas the limit is $290,319 while in Alaska, Guam, Hawaii, and the Virgin Islands the FHA single-family limit is $435,478. To find the FHA loan limit for your area, press here. For VA financing, there is a practical national loan limit of $240,000 with no money down. Speak with city and state housing officials to see if special financing is available for first-time buyers. Also speak with your senators and representatives -- as you have seen, loan limits can vary by location and what's good for Guam should also be good for Brooklyn. Question: We purchased a timeshare three years ago and now would like to sell it. Where would we start? Answer: Speak with real estate brokers who handle such properties in the community where the timeshare is located. Question: I'm 74 years old and would like to give a rental house that we have had for 34 years to our son. He is presently living in the house, and I would like to give him the full responsibility of owning it. I know that I could put it in my will for him to inherit the house, but I would like to immediately give it to him. I rented the house for 25 years to tenants -- it was depreciated before my son moved in. Can I give the house to him as a gift? If so what would I have to pay in taxes because of the depreciation? Answer: This is a great idea, but one which includes many complexities. If you give the home to your son you will create a gift that may result in substantial taxes. If your son inherits the property he would get it on a "stepped up" basis for tax purposes -- meaning its market value. He could then sell it at that price, if he wanted, without paying a capital gains tax. Alternatively, if the size of your estate is sufficiently large there would be inheritance taxes. Is the property now financed? If yes, a new name on the title will likely cause the lender to demand immediate repayment of the loan. You can give your son an annual, tax-free gift of up to $11,000 -- as can your wife, a total of $22,000 yearly. You could sell the property to your son at its fair market value and finance the deal by taking back a series of $22,000 promissory notes. You and your wife might then forgive one note per year. You need to consider the size of your estate, possible gift taxes, the value of the property and your personal preferences. Speak with a tax professional as well as an attorney who specializes in elder law for details.
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