Buying Grandmother's Home for Way Less. Problems?

Question

Hello everyone. Newb in real estate here. My grandmother would like me to buy her condo in Kailua Kona for only $80,000 so she can get out of debt but still live in the condo. The condo (fee simple) is probably worth around $250,000 to $300,000. She also fully owns the condo. No mortgage. My question is can I buy the condo for a fraction of the price without having some kind of problem?

Any help would be much appreciated. Mahalo!

Frank Chin · Answer

No, not a good idea.

My mother in law passed this summer and left her coop to my wife and her sister. We just reviewed the paperwork, and it's titled tenant in common under my mother in law's name, and my wife's sister name. Coincidentally, mom bought it for $80K in around 2006, and currently on the market for about $300K, almost identical situation to yours.

We probated the coop and my wife's tax situation is totally different from her sister. Her sister's half has a cost basis of $40K (50% of $80K) if the coop sold at $280K, approximate current market value, (her half $140K), her capital gains will be $100K ($140K - $40k).

My wife's name was not on the title, thus got a stepped up basis, meaning she just inherited it, at a value of $140K, and if sold at market, her capital gains will be zero ($140K - $140K)

Bottom line is, you will have a capital gains issue if you took it over at $80K and sell it at some later date. You would have been better recording the sale at $300K (for you a purchase), with your grandma gifting you $220K. If you do this, consult an attorney, especially if you're getting something worth $300K. We did something similar in NY, we gave mom a note for $200K on some property she owned, and then it was forgiven, and reporting the gift. At these levels, there's no gift tax, at a lifetime gift limit now exceeding $11 million.

But the problem is, grandma would be stuck with a capital gains bill right now instead of you.

The best way is consider some kind of trust with you as the beneficiary as grandma will be living there, and you'll won't be stuck with capital gains. and grandma won't be either. My wife' sister is really mad as such things were not considered back then and she is stuck with the tax bill, and my wife will be getting her share tax free. Yes, getting $140K tax free is better than getting $140K and paying capital gains on it, particularly if you're in a high tax bracket, which is the sister's case.

Spend some money with an estate attorney to figure it out. It's worth it. My sister in law is kicking herself not doing it back then.

Steve Vaughan · Answer

Def talk with a tax and estate planning pro.  As Frank above mentions, it's much better to inherit the asset than grandma's cost basis.  Could do a trust, life estate, grandma can gift $15k per year to you and your spouse via % quitclaim, etc.  Gift taxes done wrong will hit grandma at 55%.

Easiest may be to loan her the $80k in exchange for a first mortgage and a will stating you will inherit all or portion.  The loan can be payment free but probably not interest free. Check with professionals here.  I would and I'm a major DIY guy.

Colbie Corrales · Answer

Thanks for the advice guys! Much appreciated!