gifted home with HELOC question

[Carmen Marino]

My wife's father is gifting us his $400,000 home. He has a HELOC of $13,000 on the home with no other debt. Do we have to pay off the HELOC when the home is transferred to us or can we continue to pay it monthly? If we have to pay it off are we able to get such a small mortgage?

[Ashish Acharya]

@Carmen Marino, 

If you want better tax impact, he should not gift you. It is better to inherit the property to get the step-up basis.

Whether you have to pay off the HELOC depends on the lender's 'due-on-sale' clause. Because this is a transfer from a parent to a child, federal law (the Garn-St. Germain Act) often prevents the lender from calling the loan due, meaning you may be able to just take over the payments. If they do require a payoff, getting a traditional mortgage for only $13k is very difficult; most people use a personal loan or just pay it out of pocket.

However, before you transfer anything, you need to look at the tax side, because this is a gift, your basis in the home isn't the $400,000 fair market value, it's your father-in-law's original cost basis. That matters a lot if you ever sell, since your taxable gain gets calculated off that lower number. Gifting during his lifetime means you lose out on the stepped-up basis you'd receive if the home passed to you after his death, which could mean a massive tax bill for you later.

Also, if you take the home subject to that $13K HELOC, it is technically treated as a part-gift/part-sale, which changes the basis math and can even create a small gain for him. Definitely map this out with a CPA before signing anything!

Happy to connect!