Adding Son To Deed / Cash Out Refinance
My son has been living in a condominium that I own for the past four years (since I bought it). He wanted to buy it but the process was becoming crazy since he wanted to be able to pull out equity and I didn't want to make a profit when selling it to him.
The underwriter suggested that I add him to the deed and then he do a cash-out refinance . At the closing I will be removed from the deed via a quit claim form. It almost seems too easy. Is there any problem with signing it over this way?
No problem. You will have to file a Gift Tax Return for the amount of the property's FMV that exceeds $11K.
Your son's cost basis in the property will be the same as your adjusted cost basis (purchase price plus capital improvements minus depreciation).
Best that you both discuss the tax impacts of this approach with your tax advisor.
I don't understand why there would be any tax implications if I am adding him to the deed and then removing myself from the deed when he refinances. It doesn't appear to be a sale. That is what has me confused.
If you add your son to the deed, then remove yourself, your son's cost basis is your old basis. There is no tax liability to your son.
Since I don't profit from a sale I assume there is no tax liability to me as well.
You are making a gift to your son. The amount of your gift that exceeds $11K in one year is reported on a Gift Tax Return when you file your annual 1040.
Your tax advisor has all the details.
Word of Caution:
You are carrying the mortgage on a house that is 50% owned by your son once you add him to the deed. How bout handling the deed addition and quit claim at the time of his new loan closing to protect yourself.
I'll have my son check with his mortgage broker and see if they are willing to do this on a refi. Going for a refi he can take a little equity out but it he went for a new sale I would get hit with capital gains on a profit I'm not making. I like the idea though (particularly since I don't have a clue how to add him to my deed other than at a closing). It may be a stretch to see if they will agree to all steps at one sitting but we can ask. Thanks for your advice
See if this helps:
In 12/99 I purchased the home that my then divorcing son wanted. Best to keep it out of his name per divorce. Lender allowed me to take it as a 2nd home. Son moved right in and started rehab and paid ALL bills straight to everybody, showing it was his home. We drew up and signed doc showing it was his home and would be transferred to him as soon as reasonable, making him responsible. Every year, I assigned all tax benefits to him (as I was his 'no profit' lender) and he took the deductions. I never counted this as a rental in any way...no losses, no gains. When ready, 10/02, he applied for a loan, and I assigned ownership to him for 0$, just 'love and affection.' Now, some IRS/CPA pros said this was questionable, others said it was fine as long as we had the doc making him accountable, he paid the bills, and we were consistent and traceable. We were. ** I had posted this story for another member, but you might use some of it to see if it helps. Oh, also, I was involved w/his lender from the start since he could not get a loan on a property he did not 'own or have a contract on.' We all worked together. * He took the original cost basis. * Not sure if he would have qualified for 250K deduction IF sold, but he still lives there and has in fact refi'd again to take more cash out.