Transferring deed AND mortgage balance?

Question

I posted this on the RE Rookie fB page, as well as the BP FB page, but figured I might as well as here too 😬....We would be grateful for some advice on the following scenario 😊:

My husband and I have lived in a house 🏡 in Memphis, TN that my parents bought for us in 2012. We essentially pay them rent 💰each month. The house was bought for $117,000 with a 50k down payment. The house is now worth approximately 160k-170k. We are in the 8th year of the 15 year mortgage and owe roughly 37k. Once the house is paid off in full, my parents plan to gift it and transfer the deed to us.

We are new to the real estate investing world but for the last 4 months have been binge listening to Real Estate Rookie and Bigger Pockets podcasts, as well as reading the BRRRR book and following the FB forums. My mom has even started educating herself on the basics of REI and she is on board with our plan which is to get the house in my name, refinance, and use that cash to begin our real estate journey. My questions are :

***Is there a way for my parents to transfer the deed and the remaining 37k on the mortgage loan to me without having to go through the formal process of selling it to me and having to pay closing costs and getting a new loan for 37k in my name (additionally, I hear it is difficult to get a mortgage loan under 100k, at least going the traditional route)

***Or would it make more sense for me to get a new loan for market value of around $150k and have my parents give us the cash from the sale minus the 37k owed and then use that cash to either turn right back around to pay down the mortgage and THEN refinance? Or take the cash they give us from the sale and use that to start investing?

As I said, all of this is new to us… I am a nurse practitioner by trade and my husband is a paramedic. It is highly likely that I’m missing something obvious or confusing the way things work… Any and all advice is welcomed and appreciated!

Edited to add: what does everyone think about us using a hard money lender to pay off the 37k mortgage, then have the deed transferred into my name, get it refinanced and use that money to immediately pay back the HML and use the rest of the refi cash to start investing... Good idea? Or not so much?

Wayne Brooks · Answer

You can buy it “subject to the mtg” which means they transfer title to you, the mtg remains in their name until it is paid off. You could then refinance it for up to 80-90% if current value, paying off the $37k mtg. Do use a title company or attorney, whichever is common there. Buying title insurance is advised, but that’s up to you.
Jyst a nite, the “gifting the property to you” would have large tax consequences when you sell.

David M. · Answer

@Emily Phipps

Yeah, talk to some qualified professionals including estate planning...

Many issues aside, when your parents pass away (sorry to bring up this subject), there is a step up in cost basis for real estate. If they prepare a will giving the property to you, you will get it transferred to you.

The gifting issue with taxes brought up by !Wayne should a cost basis. I THINK (confirm with a professional or some really good Googling) when one gifts the property, the cost basis is zero. So, when you go to sell, your sales price minus the cost basis of zero is your capital gain. So, its only worth ~$160k now... the Sec121 exclusion is good for $500k for married couples... So, you could be okay, but I have no idea about your market.

if your parents are both alive, you could easily gift the value of the property. Either use the lifetime exclusion as previously mentioned. Or, do it slowly at $60k a year; its four transactions of $15k gifts. Your mother to you, your mother to your husband, your father to you, your father to your husband.

That all being said... The subject-to would seem to make the most sense. The cost basis is "set/reset" to current market value for you. You wouldn't pay for getting mortgage unless you wanted to refi into your name. That would be somewhat silly since you'd be taking cash out that it sounds like you don't want. Pre-COVID the conforming loan lower limit was $50k, ie you can't get a mortgage under $50k. I've heard that some to many lenders have raised that limit to $60k or $75k post-COVID. NJ property prices aren't anywhere near that low so I don't run into this issue that often :)

Hard money loan is a non-starter because you are living it in it. Besides, why would you pay such high interest rates...

Hope that helps. Good luck.

Emily Phipps · Answer

@Steve Morris and @Daniel Dietz thank you both for your input. Lots to consider it seems...

Emily Phipps · Answer

@Chris Allen thanks for your input! I'm slowly wrapping my head around all of this...

Emily Phipps · Answer

@David M. thank you so much for this explanation and advice. It definitely helps!

Chris Allen · Answer

@Emily Phipps, I agree with @Wayne Brooks. Basically what you would do, is your parents transfer the title of the property into your name, you would then take over the mortgage payments on their behalf. At that point, it is really up to you to do whatever you would like with the property, you could just keep making the payments or cash-out refinance. Just pay an attorney/realtor to transaction the deal for you, or find a title company that has experience in doing these types of transactions.

Also keep in mind, that another great option, depending on your goals, would to just work really hard at paying the property off in a year or two yeas. So instead of refinancing into another mortgage, pay off the property, get a HELOC on it, and then use yourself as the bank! The benefit of this is 1) You have a paid off house, so when you rent it out you have almost 100% cashflow; and 2) you can use that HELOC to BRRRR properties with cash and take advantage of the Delayed Refinancing approach.

Steve Morris · Answer

I'd really check with a CPA, I think that's not correct.

Steve Morris · Answer

TALK TO A CPA FIRST.

Gifting it to you is not a very efficient tax strategy since you'll be way over the $15K/year (I think that's the right number).

If you're going to stay in there, you could do a trust with rights of survivorship for no tax consequences. As long as you parents are in it I think the loan stays unchanged (ASK YOUR LENDER FIRST).

Cheaper yet would be a Transfer on Death, but trust is better I think

Transferring deed AND mortgage balance?

Transferring deed AND mortgage balance?

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