Owning Home With In-Laws
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 755
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader is currently
living in a home that her father-in-law owns. She is wondering how he can transfer
the home to her so she can get a tax break. Ilyce and Sam explain quit claim
deeds and gift taxes.
Q: My father-in-law used to own a condo that my husband and I and our two kids
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My husband is a contractor and agreed to fix up the dated condo in exchange
for his father help with a down payment on a home.
His father sold the condo using a 1031 exchange and replaced that property
with a single family home. When he completed the 1031 exchange, he helped us
with a down payment and kept the rest he made off the property.
He put us on the deed to the property after a year but when I read the documentation,
it only shows that we occupy the property. We pay almost $3000 a month, including
the mortgage, property taxes and the association fees we pay for lake usage.
Every month he makes us give him the mortgage money, which he then uses to
pay the bank. So obviously, the bank doesn't see us as owners of the property.
He says he will do what we want to give us ownership but he is worried about
a gift tax.
Could he just do a quitclaim? Is there a tax with this? Would we have to refinance?
Could he write some type of letter to show we have paid him? We would like the
tax break and I don't know if we are entitled to it.
A: Your question is rather complicated. Your father-in-law owned an investment
property. Your husband fixed up the investment property and then your father
in law sold it.
A 1031 exchange referrers to a statute that permits owners of investment property
to sell their existing property and defer the payment of federal income taxes
on the sale. To defer taxes, the owner must replace that property with a replacement
investment property within a certain time period, usually 180 days from the
sale of the original property.
The new property must be owned for investment and must be kept as an investment
property for some time after the purchase. Some experts in the 1031 exchange
arena state that the property should be kept as an investment property for two
If your father in law gifts the property to you, he will have to pay federal
income taxes at the time of that transfer on all of his profits. He will obviously
want to avoid doing this, because it could be quite costly.
Now let’s get to you. In essence, you are correct. You don’t own
the property. Your father in law does. And he has certain, significant tax issues
that he faces if he simply transfers title to you.
The smart move would be to have you, your husband and your father-in-law sit
down with an estate planning attorney to work out a way that your father-in-law
can transfer title to you. The estate planning attorney may need some assistance
from an accountant who has good experience with 1031 tax free exchanges and
knows your father in law’s tax issues.
It’s difficult to tell you what form the transfer should take place without
knowing more details, but if your goal is to own this particular home without
causing your father-in-law to go through a tax nightmare, you should bring in
the professionals who can help you find the right solution..
If you must own your home now, the best bet for you would be to save up enough
money to buy your own home, get your own financing, and let your father in law
rent the existing home and manage that home as an investment property.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com