Q: I wish to set up my daughter and son with a house. My plan is to buy two houses and rent them to each family but not collect any rent except for what it costs for the property taxes and insurance. Then at my passing, they will inherit the houses at the stepped-up value at that time. Would this option be better than buying the houses, selling them to the kids, with my carrying all the papers but not requiring them to make the payments except for what it will cost me, again, for the property taxes and insurance?
This second option would not allow for the stepped-up value of the properties at the time of my passing. They would be required to pay for all the upkeep in both scenarios. And above all, is this legal? What sorts of problems might I encounter from the IRS?
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A: You are to be commended for your fatherly support. Frankly, while both options appear legal and doable, I prefer the first one.
If you buy and sell, you may have to pay a double recordation/transfer tax. Many states do have exemptions for transactions between parent and child, but even then, there are logistics to deal with. You will have to transfer a house to your son; you cannot add his wife to the title without paying the tax. Once he gets title, he will then have to add his wife to the title. And the same procedure would apply for your daughter.
Another concern, which you mentioned. If you sell the properties to your children, they will not get the benefits of the stepped-up basis. That’s a tax provision whereby the value of the property when you die becomes the tax basis of the persons who inherit from your estate. This may not be a real problem if the kids qualify for the up-to-$500,000 exclusion of gain by owning and using the house for two out of the five years before it is sold. But Congress is seriously looking at tax reform, and this great exclusion may be repealed or reduced.
But perhaps my biggest concern is that one never knows what the future will hold. You may have fights with your kids; one of them may get a divorce, or file for bankruptcy relief. There are many reasons why you should keep the houses in your name but name the kids in your last will and testament.
And if your state has adopted the transfer-on-death-deed law, talk to your attorney about this new concept. That act was designed to take care of situations exactly the same as yours.
Q: The house next to ours is being torn down and a new home will be built. We are concerned about our old frame house with its 100-year-old-plus foundation. Any advice about preparing prior to the tear-down? How should we work with (the) builder/owner to make sure our property is not damaged?
A: The first thing you should do is find out what the applicable building codes require where you live. From my experience, many jurisdictions (states, counties and even cities) have requirements when major construction takes place in residential neighborhoods. Your local government most likely has a code enforcement section, and you should meet with a representative to learn as much as you can about the process. You should also obtain a copy of the builder’s plans.
Next, you should meet on the site with the builder. Have him explain what they are doing, and find out what steps they plan to take to protect your house.
Try to convince the building company that it should give you some money, say $2,500, so that you can retain a structural engineer to periodically monitor the work on your behalf. I have been able to convince many builders to do this when I have been representing next-door neighbors such as yours. But if the builder refuses, it would still make sense for you to retain an engineer on your own. You have a valuable, old house and don’t want it to be damaged.
Finally, I would take lots of pictures of your house, both inside and outside, so as to demonstrate what the house originally looked like in the event of subsequent damage.
Benny L. Kass is a practicing attorney in Washington and Maryland. No legal relationship is created by this column; [email protected].