Dad died several years ago, leaving the house to our mom. She died last year. I live in the house and would like to own it, but my brother — who lives in California — wants to sell. We are at an impasse. What should I do?
This is an all-too-common problem, which could be resolved by the parents with proper advance planning. Unfortunately, that is not always the case, and we end up with situations such as yours.
Have you talked with your brother to try to reach an amicable resolution? One simple solution, if you have the financial resources, would be to buy him out. That would mean that you need to get the house appraised, using an independent appraiser approved by your brother, and pay him half of the appraised value. If you do not have enough money, you will have to get a loan from a commercial mortgage lender.
But there are questions that must first be answered. How did your mother and father own the house? If title was held as tenants by the entirety, or even as joint tenants with rights of survivorship, then when your dad died, your mother became the sole owner of the property. This is known as a “transfer by operation of law.”
On the other hand, if title was held as tenants in common, or if for some reason only your dad owned the property, then it would be necessary to probate your dad’s estate. This means that you have to go to the probate court in the jurisdiction where your father died. Someone will have to be the personal representative (PR) to administer the probate proceedings. If your dad had a will, in most cases a PR will have been appointed in that document. Otherwise, the court will appoint a PR. In Virginia, if there is no will (called “intestate”), probate may not be necessary. Virginia residents should consult their own attorney.
Ultimately, because your mother is the “next of kin,” the court will close the probate case, and the PR will formally transfer the deed to your mother. However, if probate did not take place, at the present time legal title to the house is in a state of limbo. Either you or your brother will have to open a probate case, even though the death was several years ago.
The next question is whether someone probated your mother’s estate. Whether she obtained title through operation of law or through the probate court, her estate must be probated because she was the sole owner when she died. Again, I have to ask if she had a will. If so, the PR of your mother’s estate would be obligated to honor her wishes and convey the property as she directed. If there was no will, you and your brother, as next of kin, will end up owning the property equally, as tenants in common.
Now, unless all of the steps discussed above have been taken, neither you nor your brother has clear title.
However, if probate was accomplished, title is in both of your names. You want to stay in the house, but your brother wants to sell. As discussed above, the easiest way to resolve this is to buy out your brother.
But if you cannot afford to do this, ask your brother if he would lend you the money. This would not require him to put up any cash. He would deed his interest in the house to you, and you would give him a promissory note, whereby you agree to pay him a monthly sum, including an agreed amount of interest, over a period of years. You would have to agree on the terms of the sale.
You would also sign a deed of trust to the property, which would give him the right to foreclose on the house if you became delinquent on the loan. If the deed of trust is recorded among the land records, you can deduct the mortgage interest, but your brother would have to report that as income on his tax returns.
Another alternative would be to find a friend or a relative who could assist you, either by lending you the money necessary to buy out your brother or by actually going on title with you and getting a mortgage loan based on his or her financial strength. You would need a written partnership agreement to protect your interests, should circumstances change in the future.
I have to caution you that regardless of how close you and your brother may be, if you cannot reach an agreement, he has the right to file a partition suit in the local court where the house is located. This means that a judge will order the house to be sold and the proceeds divided equally between you. My experience with partition suits is that the only winners are the lawyers involved in the lawsuit and the speculators who end up buying the house.
What’s the bottom line? If you really cannot afford to stay in the house, you will have to put it on the market for sale. While there may be some tax consequences involved, I suspect that they should be minimal because of a legal concept called the “stepped-up basis.” Let’s say that Mom and Dad bought the house for $50,000. Mom and Dad’s basis for tax purposes was $25,000 each. When Dad died, the house was worth $100,000. Mom got a stepped-up basis of $50,000 on Dad’s interest in the property, so her basis became $75,000.
On her death, the property was worth $400,000. You and your brother’s tax basis is the value of the property on the date of death, namely $400,000. If you sell the house for that amount, you will not make a profit and, thus, will not have to pay any capital gains tax. Of course, if you sell it for more, say $500,000, you will have made a profit of $100,000, and you and your brother will have to pay capital gains tax of approximately $25,000 (15 percent federal, plus any applicable state or local tax). That would still leave you $475,000 to divide between you. For purposes of this discussion, I am not including expenses, such as real estate commissions, which would reduce your gain and, thus, your tax obligation.
Talk seriously with your brother to try to resolve this. If that does not work, then you will have no alternative but to sell the house.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.