Parents should look at all angles before giving house to their children

Q: My parents, who are in their 70s, would like to sign over the deed to their home to my sister and I. What would the tax ramifications for all parties involved be? My sister and I each have our own homes. We live in different counties.

I have noticed in real estate transactions that homes can transfer for one dollar. Should we do this? The home, if it were sold, would probably be worth $200,000. My father is afraid that if one or both of them end up in a nursing home, the government would end up with their property.

My parents do have a will and it states that my sister and I would be left with the house and contents. We are all just concerned what kind of taxes could be levied. -- L.H.

A: It isn't likely any federal gift tax would actually be due if your folks gave you the house. But if they later wanted to qualify for Medicaid, the welfare program for nursing homes, the value of the house would still count against them for at least five years after the gift.

When you and your sister received the property, you would also take over your parents' cost basis. If the place were later sold (even if your folks were still living there), you would owe capital gains tax, figured from their cost basis. They could not use the home sellers tax-free sale because they wouldn't be the owners.

If, on the other hand, you waited to inherit the property, you would get a new cost basis, value as of the time of death, and have little or no taxable profit when you sold.

Other drawbacks that I can see: Once you owned the house, it would be vulnerable to any judgments you or your sister might incur, and complications if either of you were involved in a divorce or died.

So "should we do this?"

Perhaps there are good reasons for it. What you and your parents should do is consult a lawyer who specializes in elder law. That's someone who can analyze their situation, and only then offer advice.

Did husband cheat?

Q: Our home (no mortgage) is in both my husband's and my names. Would it have been possible for him to obtain a home equity loan without my knowledge? -- Via e-mail

A: It shouldn't have been possible. Lenders usually want all owners to sign documents, and of course a home equity loan is simply a form of mortgage.

Of course, there's always the possibility of a forged signature. To find out if there's a loan against your property, inquire at your county's public records office. If you find a debt on record, it's time to consult your own lawyer.

Landlord faces foreclosure

Q: If my landlord is in foreclosure do I need to pay him rent? -- Via e-mail

A: Yes, as long as he still owns the house.

Selling after exchange

Q: I recently heard there is some movement in Congress to change the two-year residency rule in order to sell a house tax-free and make it five years, at least in relation to 1031 exchanges. Can you confirm or deny? -- E.L.

A: That new regulation is already in effect. It's intended to stop abuse of Section 1031 for tax avoidance. You might acquire a house through a Section 1031 tax-deferred exchange of investment property, and then convert the new "investment property" into your own home. But after that, you couldn't sell it and claim the home sellers tax exclusion on the postponed capital gain until it had been your principal residence for at least five years, instead of the usual two.

Edith Lank will respond personally to any questions sent to her at 240 Hemingway Drive, Rochester, NY 14620 (please include a stamped return envelope), or readers may e-mail her at ehlank@aol.com.