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Call a lawyer, get agreements in writing when passing property to relatives
May 22, 2013
It used to be tradition — a family farm that was handed down through the generations, with children raised in the same home as their parents.
Nowadays, though, passing property to relatives isn’t as common and usually takes the help of a lawyer.
“Realistically, a transaction with a family member should be treated the same way” as a conventional sale, said Dan Gutfreund, a realty specialist with SKBK Sotheby’s in Birmingham.
He said it’s not something he has seen often in his real estate business. When relatives sell real estate to one another, however, it’s helpful to make sure the loan is paid out.
“As long as the property is owned free and clear, the transaction can take place for a nominal (amount),” he said.
Jerald Shatzman, a Bingham Farms attorney with Shatzman & Associates P.C. specializing in taxes and estate planning, said parents selling a property to a child should make sure to file a property transfer affidavit to protect property values for the municipal assessor.
But these days, “with the property values so low, I don’t think you usually have an issue” with that, he said.
Another way to sidestep the issue and protect property values for the community is to make the transfer a gift.
“If somebody’s selling a $200,000 house to their son or daughter for $50,000 … they can make (it) a gift,” he said. “The basis for the (value of the) property becomes the parents’ basis if they give it to their children.”
The property must be owned free and clear by the parents in this scenario, though, he said.
“If there’s a mortgage, they ought to check with a creditor,” he explained.
Current tax law allows a gift of up to $5 million tax-free; parents can give up to $10 million to their children, he said.
“What they should do is have their tax lawyer or accountant file a gift tax return because that helps to document how the kids got the property (and) also documents the valuation of the property,” Shatzman said. “Most people don’t have to worry about paying any gift tax because you’ll have a $5 million exemption, and if it’s Mom and Dad, they have a $10 million exemption.”
Another method of passing property down the line, especially if the relative or child will need a mortgage, is by land contract.
“Let’s say they apply for the mortgage and can’t get it,” Shatzman said. “They can make a transfer on a land contract. Parents continue to own the equity and the kids can make monthly payments on the land contract.”
Parents can even “gift away” a portion of the contract each year because, at the end, the cancellation of the contract is treated as income.
“If they do it right, they can actually make a gift of the portion of the debt,” he said. “You want to keep peace in the family, work out an arrangement where the person who’s buying it can afford it, and you want to make sure you don’t have any problems with the Internal Revenue Service.”
To avoid hurt feelings or misunderstandings, Gutfreund said it’s important — no matter the deal — to get it down in writing first.
“Always put your deal in writing and make sure that at least it has a witness there to make sure everybody is clear,” he said. “When it comes to transactions of high value … emotions are generally running high and you want to make sure that every deal is carved out clear that everyone can agree to. You want to make sure that family members are on the same page, when it comes to the transaction.”
Discussions such as these are fraught because you’re dealing with “people problems,” Shatzman agreed.
“Making family stay family is a big issue,” he said. “You have to try and keep peace in the family.”
Shatzman said he’s working on a gift tax return right now for a client with a large portion of land who is giving the residence and part of the land to his son and daughter-in-law.
“They’re helping them along. It’s not an uncommon situation,” he said.
And when the passage of property happens in a bequest from a will, Gutfreund said selling the property is by far the most popular option.
“Divvying up the cash is a lot easier than saying, ‘You own one-third of this property,’” he said.
For more information about SKBK Sotheby’s in Birmingham, call (248) 731-1030 or visit www.sellmyhouseinbirmingham.com. For more information about Shatzman & Associates P.C. in Bingham Farms, call (248) 646-0300.
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