Client wants to give rental property to tenant/sister

[dhawkcpa]

Client has been renting a house to his sister for fair rent since 1995. Client has been diagnosed as terminal in 3 months to 3 years and wants to give the house to his sister. I suggested willing it for the stepped up basis. House FMV is $200K, adj basis is $30K and the mortgage is $140K. Tax on an outright sale would be in excess of $45K. The mortgage is in the names of the client and his spouse. Client does not wish to burden his wife with either the house or the mortgage. It is doubtful that the sister could qualify for a mortgage in this amount based on her income. Thanks for any thoughts & suggestions.

Dennis

[ChEAr$]

Client doesn't happen to have a life insurance policy with sister as beneficiary, does he?

Short of depending on his wife, who one would presume inherits everything, to pay off the mortgage with her insurance proceeds, again, assuming any,
I don't see any way for sister to be given the house without assumming the mortgage, that is if bank would assent.

[dhawkcpa]

Life insurance only goes to wife, none to sister.

[Burke]

The house can be left in the will to the sister. However, she would take it subject to any indebtedness on it. Could she make the payments? The bank would not likely let the wife off the hook if the sister could not qualify for a loan. So it's sort of like a "wrap." Have the client talk to his attorney about this situation. In many states, the wife could set aside the will and take 1/3 or some other percentage of the estate, which might include this house. He needs the advice of someone who deals with wills and estates and knows the local laws.

[erchess]

Interesting scenario

If I understand correctly he wants his sister to get the rental house free and clear and he does not want to leave his wife with debt from his doing so. Other than paying off the mortgage before he dies with cash that is on hand or comes from sale of currently owned assets I don't see how he gets there. As Burke pointed out he needs an attorney who handles wills estates and gifts where he is to advise him whether to gift or bequeath the house to his sister. Her tax basis would seem to matter less, even if she does want to sell before she qualifies to exclude half a million in gain, than whether his wife can interfere with the arrangement.

In a perfect world a dying husband and surviving wife would be of one mind concerning his arrangements to take care of his relatives. This is not a perfect world and since everyone leaves behind a finite amount of wealth such harmony is not to be counted on.

[dhawkcpa]

Client actually wants his sister to own the house and have only her name on the mortgage. He doesn't want to pay off or down the mortgage and doesn't want his wife to be stuck with it either.

[JohnH]

The only way that's going to happen is if the sister gets a loan in her own name.

[ChEAr$]

The only way that's going to happen is if the sister gets a loan in her own name.

And then, only if she can qualify, which in OP the answer was no.

[Gary2]

These situations are some of the least fun, most stressful aspects of the job. But part of the job is to separate out the emotions on the client's behalf. What he wants, what he thinks he wants, and what he can achieve are three separate things.

Somebody is going to have to pay the mortgage. Is his sister actually capable of making the payments (independently of whether or not the mortgage holder will allow it to be in her name)? If she can't, then putting it in her name entirely isn't going to help anyone; it will make things worse. If she can, then maybe there's room for some negotiation with the lender.

Another question is why doesn't he want his wife involved. Is he afraid that the sister won't be able to keep up with payments, and his wife will be on the hook? Or is he afraid his wife won't put his sister's best interests first? Or is it simply that he doesn't want them involved with each other at all? Each possibility could lead to different solutions.

[RLymanC]

House

Is it legal to give advice on this matter???

[veritas]

If by some remote chance

the sister got a mortgage to pay off you client's mortgage you would have a sale.

[Nashville]

Up jumps the devil

This is just another factor to make things sticky, and yet another reason this client should seek out a good lawyer.

Assume he has three years to live, and the sad truth is he will be beset with three years worth of going to the hospital, to doctors, and piling up a gazzilion $$$ in medical bills. Then he dies owing some $750,000. [Don't gasp -- this can happen].

If this happened in my state (and in MOST states, I think), the medical lobby has been successful in establishing a 3-5 year "lookback period." This means they can access any transfers of property made within 3-5 years of death and actually reclaim it if necessary to pay otherwise unpaid medical bills. Nursing homes in my state do this all the time.

The house in question could actually be sold to pay for the hospital administrators' BMW, the oncologists' wife new swimming pool, the drug company's exalted stock price. If he doesn't pay the medical bills, these people can come after him in court like he's a common crook.