QUESTION: We are in our mid-sixties, and plan to retire to Florida shortly. We have one son. We have a house worth approximately $200,000, on which there is no mortgage. We would like to know whether there are any estate and tax benefits that we can arrange now before we list our house for sale. Please let us hear from you.
ANSWER: There are a number of paths that you can take. You can give the house to your son (although there are limitations on the amount of a gift), you can sell the house directly and give your son yearly gifts, or you could consider selling the house directly to him.
If you sell your house now--and on the assumption that you have been living in your house for at least three of the last five years--you can exclude up to $125,000 on the gain on the sale of your property. This is known as the "once-in-a-lifetime exemption."
If you sell your house to a stranger, the cash that you receive (or the note which may take back) is part of your estate.
But why not consider selling the property to your son for its full market value? You can take back a note, and structure the payments so that they will produce little, if any, negative cash flow for your son. In other words, you anticipate what the monthly rental income will be, less expenses such as taxes, insurance and maintenance, and the note is tailored accordingly.
Because your son bought the property for full market value, he would be eligible to take depreciation under the new tax laws. This depreciation basis is quite favorable today. The monthly payments that your son would make to you may be needed income, but if properly structured (and depending on the circumstances), the only income that you would need to report would be the interest that you are earning on the promisory note. This takes some careful tax planning, and you should see your tax adviser before entering into this type of deal.
While we do not plan for death, like taxes it is inevitable. Then the note would be cancelled and would not be part of the estate--and thus no tax would be due.
This is an interesting way to utilize the tax laws, so as not only to cut down some, if not all, of your estate taxes, but also to provide a good tax shelter for your son. At the same time, you will be receiving income from the sale of the property.
Needless to say, this plan is not for everyone. You may need all of the money from the sale of your present house to meet your new life style in retirement. However, it is an option that is available to you, and certainly deserves attention.