Consider the various issues when selling home to family members. You must figure out how to value the home and improvements made to the home. You should also consider estate planning issues and gift tax questions.
Q: We have a bachelor son and a married daughter. In 2016, we invited our son to move back home with us. He agreed on the condition that we renovate our basement for him to live there. We’re thinking about selling the home to our son as he’s expressed interest in becoming the owner.
Our basement definitely required renovations. We spent $60,000 renovating the basement and paid for it through a home equity loan. Our son has been making the loan payments for the renovation as his rent.
Selling home to family members after basement renovation
Recently, our son expressed interest in buying the home from us when the time comes. In a normal situation, we would sell the home and keep the money from the sale. We could then give each of our kids half of the money from the sale. Or they would get the money equally once we die. Should our son take over the home or buy the home from us, we told him that we’d do it at the home’s then current assessed value. We’d let him keep his half but he’d have to pay the other half to his sister.
How do we deal with the $60,000 we put into the basement. And our kids interest in their shares of the home?
A: You have a doozy of a question there and we’re not sure you realize some of the issues you may face outside of the $60,000. Since you asked that question directly, we’ll answer that one first.
Under normal circumstances, when you invest money into a home, you hope that investment increases the value of the home. Let’s say you put in a new kitchen and spend $30,000. You’d hope that if you list the home for sale, you’d get back the $30,000, if not something more.
Home renovation may increase home’s value
Your investment in the basement would, in a perfect world, increase the value of your home. But real estate doesn’t always work that way. Frequently, some home improvement projects and renovations increase the home’s value just a fraction of the amount you put into the renovation or improvement. Some renovations do better than others. Sometimes it depends on where the property is located (neighborhood, city or state).
Consider this: It’s possible that when you sell your home, even with a renovated basement, the value of the home might be the same as before the basement renovation was undertaken.
Many families hope to pay off their home and then use those funds in their retirement. This is probably a good time to say that we think whatever money your son has put into paying back the home equity loan is irrelevant to the conversation about what happens to the house and any cash derived from selling it. Your son paid you rent to live in your home. It happened that the rent was equal to the home equity payments. But, what if he was making the payments on an interest-only loan and you still had the balance to pay off? What if he moved out half way through paying back the loan? Would you ask him for a check for the remaining balance on the way out the door? Probably not.
So, let’s take that off the table. Even though you invited him to live back at home, it seems fair to us that he would, as a working adult, pay some sort of rent. Now, you mentioned you may be interested in selling the property and splitting the proceeds amongst your children. Your son might also want to buy the home.
Appraising home for its value — use an appraiser or real estate agent
If your son wants to buy the property, you should have it appraised. You can hire an appraiser for around $500. Don’t use the property’s the tax assessment as the value for the home. The tax assessor’s value may not equal the current market value for the home. And, above all, talk with your children about the value of the property. If your son wants to buy the property, he should get a loan from a lender and make an official offer to purchase the property for the amount of the appraisal.
You mention having him give half of the property to his sister. That isn’t a good idea. If he wants to buy it, then your son should buy the entire property, giving you the cash. Once you close on the deal, you can decide what to do with the cash. You might intend to give half of the proceeds to each child. But you can give your son the option of getting a mortgage for half the value of the property. If not, then after the closing, you could give the proceeds to your son and daughter, either in one lump sum, or in $15,000 chunks over time.
On the other hand, if you plan on giving the money to your kids after the sale, understand that a gift of over $15,000 will require you to file a gift tax form with the Internal Revenue Service. Unless you have a very large estate (over $11,700,000 for an individual, $23,400,000 for a couple filing jointly), the gift tax filing won’t matter to you and your family. Your kids wouldn’t have any tax to pay. You’d only be required to file the gift tax forms to show that you gave your kids the cash.
Consider estate planning issues before gifting home to family member
The story doesn’t end here. There are other issues that you should discuss with a real estate attorney or someone familiar with your finances and your situation. You should consider whether you’ll need the money to live on in the future. Many people in your situation would be better off investing the cash and then passing it onto their heirs as part of their estate. Also, consider where will you live after you move from this home. You should also consider whether you’ll need the funds from this home to buy a new place. Lastly, consider your living expenses and the funds you’ll need in retirement?
Please be sure you understand all of the ramifications that might flow from actions. Discuss these issues at length with your spouse or partner. Make sure you’re both on the same page. And, always clearly communicate your intentions with both of your children, preferably at the same time so they can ask questions and hear each other’s perspective. Good luck.
When selling home to a family members, you must figure out how to value the home and the improvements made to the home. Then you need to figure out what’s best for you before you move forward and transfer ownership of the home to a family member.
©2021 by Ilyce Glink and Samuel J. Tamkin