Renters reaping real estate tax benefits?

Couple hopes down payment gift will qualify them

Benny Kass
Inman News™

DEAR BENNY: My husband and I recently filed for bankruptcy after our home was foreclosed. My mother is willing to purchase a home in her name (as an investment property) and rent it back to us, as long as we can come up with the down payment for her purchase. My in-laws have agreed to provide the down payment. The terms of the investment loan do not allow the down payment to come from a third party, so the money needs to be "gifted" to my mother.

Essentially, we would be renting the property back from her. Would there be tax implications to her? Could my husband and I get the tax credit for the mortgage interest and property taxes? –Heidi

DEAR HEIDI: Sorry for your real estate loss, but it sounds like you have a great family to back you up. Your mother’s house will be a straight investment. She can deduct for tax purposes the real estate taxes and the mortgage interest she will pay and she should also be able to take depreciation over the years.

Assuming you will be paying her monthly rent, that will be ordinary income to her. Your mother should consult with a tax adviser before she moves forward with the purchase.

As for whether you and your husband can take the interest and tax deductions, the answer is no. Although there are some exceptions, the general rule is "he/she who pays the mortgage — and is named in the mortgage documents — gets the deduction."

In order to be able to take these deductions, there must be a deed of trust (or mortgage) actually recorded in the county where the property is located. In your situation, there will be such a recorded document, but it will not be in your names.

DEAR BENNY: I would like to save myself $200 in lawyer fees by changing over the deed to our condo from joint tenancy (my husband and myself) to our living trust. When we purchased the condo four years ago, we failed to place it in our existing living trust although we do have all those papers. It was just carelessness on our part.

I called an attorney here in Illinois who said it would cost $200 plus a filing fee at the recorder of deeds office. He also said I could probably do it myself by going online and downloading the quitclaim form, and then bring it to the recorder of deeds. There are multiple quitclaim forms. Could you advise me step by step how to do this? I am a senior citizen unfamiliar with legalese. –Joanne

DEAR JOANNE: You are correct. If you create a living trust but fail to put your property formally into that trust, you still own the property but the purpose of the trust is nullified.

I appreciate your concern to save some money, but in the long run, it may be money well spent to get professional, legal advice.

However, in some counties, the staff of the local recorder of deeds is helpful. So I suggest that you take your legal documents (the living trust agreement) to the recorder of deeds office in the county where your condo is located and ask if they have a quitclaim form that you can use.

If not, pay the lawyer and have peace of mind.

DEAR BENNY: If I were to sell my house, I could get approximately $75,000 over what I paid for it when I bought it. Can the gains be used against the $60,000 I lost in the stock market? –Kathy

DEAR KATHY: If you sell your house, are you eligible for the up-to-$250,000 exclusion of gain? To be eligible, you have to meet the ownership and use tests — i.e., you must own and use (i.e., occupy) your house for two years out of the five years before it is sold. If you are married and file a joint tax return, you can exclude up to $500,000 of your profit.

If you are eligible for this exclusion, you can claim only up to $3,000 per year on your $60,000 stock loss. You can, however, carry the remainder forward indefinitely until you have used up the amount of the stock loss.

On the other hand, if you are not eligible for the gain exclusion, then you can offset the capital loss against any profit you will have made on the sale of your house.

But please talk with your own financial adviser about your specific situation.

DEAR BENNY: My wife and I inherited jointly my parents’ summer home in New Jersey. Title to the property remains in my parents’ name. How can the title be changed? –Francis

DEAR FRANCIS: This situation — in which the parents own property, die and the kids inherit the property but title remains in the names of the parents — is common. Legally, so long as you have death certificates, certified by your state (or local) department of health, you really don’t have to do anything. If and when you want to sell the property, all you need to do is show the title attorney (escrow company) those death certificates.

However, many people want to change the title out of their parents’ names. An attorney should be able to do this for a nominal fee. The new deed has to be recorded among the land records in the office of the recorder of deeds where the property is located. I have found that many staffers in those offices are helpful and can assist you with the necessary forms. However, those staffers are not permitted to provide legal advice.

DEAR BENNY: Regarding whether to give houses to heirs as gift or let heirs inherit them, you have expressed your preference numerous times. In general, I agree with you to let heirs inherit houses so that they get stepped-up cost basis and hence won’t pay capital gains tax. However, for those who have large or even moderate estates, it’s better for them to give houses to heirs when the property value is low.

That’s because when heirs inherit houses, if the property value increases a lot, the chance of estate value exceeding the exemption amount becomes very high and hence they will have to pay estate tax. And estate tax rate is forbiddingly much higher than that of capital gains tax. –Yixin

DEAR YIXIN: First, I want to clarify something you said. It is not necessarily true that when one inherits property and gets the stepped-up basis that one does not have to pay any capital gains tax. If the basis on the date of death is, for example, $500,000, but the kids end up selling for $600,000, they will still have to pay tax on the $100,000 profit. Clearly, if they sold it for only $500,000, there would be no tax to pay.

In response to your suggestion that there are times — especially when the estate is large — that it may be better to give the kids the property while you are still alive, my answer is that it depends on a number of facts. You have to take into account how low the tax basis is, what is the property used for (i.e., whether it’s depreciable property where the stepped-up basis will be significant), and how large the estate is likely to be.

Additionally, estate planners must keep in mind that our estate and income tax rates are not carved in stone, and may significantly change in the coming years.

And there is always the personal aspect: Do you really want your children to own your property while you are still alive? As you get older, you may want — or need — to pull out some of the equity in your property, but obviously if you no longer own it, that can’t happen.

I agree that there may be situations where it is better to give the kids property now, but you have to do your homework and do the numbers. In any event, if you have (or anticipate having) a large estate, you should have professional assistance from a tax and estate attorney.

So the answer is "maybe, depending on all of the facts."

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to

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Copyright 2011 Benny L. Kass