As a FSBO lawyer, I love helping families save money when transferring real estate from one family member to another. It’s an easy process, and filled with gratitude as family members help one another meet their goals! The most common situation is parents selling or gifting a home to their son or daughter, or helping the child qualify for a mortgage (gift letter or equity gift).
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Here is what most people do on these transactions, but anything can be customized to meet your goals:
Normal paperwork. We use the normal paperwork and forms to process the transaction. This helps ensure the transaction is documented properly/legally, and it allows for an easy close of escrow. For example, we’ll use the standard CAR form purchase/sale agreement, and the required TDS disclosure form. It is customary (though not required) to utilize an escrow company to process funds and record the deed.
Cost and Tax Savings. There are several ways to save money on family transfers:
- No agents, no commissions. This can save tens of thousands of dollars. Obviously there is no need for real estate agents on family transfers. A flat fee lawyer like myself can prepare all the needed paperwork and handle the transaction with zero commission.
- No title reports. This can save a couple thousand dollars. Many families already know the title history, so they can save money by foregoing the purchase of a title policy. This is not an option though if the buyer is using a loan to purchase the property (because the buyer’s lender will require a title policy).
- No escrow. This can save a couple thousand dollars. Some transactions are so simple (i.e., no commercial lenders) that an escrow is not even needed. We just handle the paperwork and any financial transfers directly between the interested parties, and then we record the deed with the County.
- Tax Basis. This can save thousands of dollars annually. On transfers from parent to child, there is a form that can be submitted to the County so that the child can continue paying the low annual property taxes of the parent. There is also a tax benefit for grandparent to grandchild transfers (if the parent has already passed away). For family transfers that do not qualify for the tax benefit (i.e., brother to brother), one option to keep the tax basis low is you can choose the minimum possible purchase price that could reasonably be considered market value – the neighbors might not be pleased, but if the County agrees that your purchase price reflects the market value, then you’ve reduced your annual tax bill as much as possible.
- Seniors (and almost seniors). People over age 55 who are moving their primary residence get a special tax break in California.
Gifting. Often a family member will give a home, or a portion of the equity, to another family member. It’s a good idea to document any gift so that you are safely navigating tax laws. These are the key tax laws to navigate:
- Uniform Estate and Gift tax (aka death tax). As an American citizen in 2022, you have a lifetime estate and gift tax limit that allows you to give away up to $12 Million with zero tax consequences — there are IRS reporting rules, but no tax is due. That $12 Million number changes over time depending on how much the US Congress decides to tax people. Most Americans don’t have multimillion dollar estates, so they don’t need to worry about triggering the $12 Million dollar limit. But for those $12M+ very high value estates, there are tools to maximum your tax benefits (such as portability, staggered giving through seller-financing, family businesses, and annual gift tax exclusion).
- Annual gift tax exclusion. In 2022, there is an annual gift tax exclusion of $16,000 (example: dad can give his son $16,000 tax free, and does not need to report it to the IRS). And this annual gift tax exclusion can be combined cumulatively (example: dad and mom can combine their $16,000 limits for $32,000 total, and can double that again (to $64,000) if giving to both son and his wife.
- Advance on inheritance. It’s a pretty common situation that a parent wants to help one child, but ensure that their siblings are treated equally. The solution is called ‘advance on inheritance’. Basically, it means that if the borrowing child pays back the parent, then that child later receives his full inheritance upon the parent’s death. But if the borrowing child is unable to pay back the parent, then that child’s inheritance is reduced by whatever amount that child failed to pay back. This ensures all the siblings are treated equally upon the parent’s death.
- Gift Letters. If a lender is involved on the transaction, the lender will want to see a formal gift letter that confirms any gift of equity or funds between family members.
Seller Financing. This option is relatively common. For tax savings or income consistency, many families like to do low-interest or zero-interest loans to allocate payments over time. There are many ways to customize seller financing (aka owner carryback) to maximize tax advantages.
Greg Glaser, Attorney at Law
I help home buyers & sellers throughout California
209-785-8998 — email@example.com
Flat Fee Packages Available (no commission) for Buyers and Sellers Without a Realtor