DEAR BENNY: I read your response to the person trying to unload his time share. I wish to inform you that contrary to popular belief, there is a very active time-share resale market out there, one in which our company has been very active for almost 26 years.
When advising a time-share owner we always tell them there are two rules they must absolutely follow:
1. You must use a licensed real estate broker. That’s the law unless you want to just advertise it as a for-sale-by-owner property.
2. Never, ever, under any circumstances, pay money upfront. Those are scams, pure and simple. –Tom
DEAR TOM: Thanks for writing, and I am sorry that I am not giving out the name of your company. I do not want my column to be a source of free advertising.
However, your two points are right on point, and I appreciate your writing.
I would have preferred that consumers not buy into time shares. But it’s very difficult to object when a handsome gentleman (or attractive woman) is telling you all of the benefits of buying into a time share. And, they say, "If you sign up today, we will give you X, Y and Z."
Bottom line: Take the contract home and think about it overnight. And if the company refuses to give you the contract to review, tell them "thanks" and walk away.
Selling unwanted time shares is perhaps one of the questions I get most from readers. And I don’t really have a good answer for them.
DEAR BENNY: What are the tax complications, if any, on giving my home to my brother as a gift? –Ed
DEAR ED: There are several potential complications, for both you and possibly your brother.
Let’s take you first. If the house is valued at more than $13,000, you will have to file a gift tax return. No tax will have to be paid at that time, but it could impact your estate.
Currently, the lifetime unified gift/estate tax is $5,000,000, with portability feature for spouses. And the annual gift tax exclusion is $13,000. So the value of your house over $13,000 will reduce your overall $5 million gift/estate tax exemption. Some people with significant assets would do the transfer during lifetime so that any appreciation of the property is out of the estate. But, this can impact on your brother.
Let’s assume for this discussion that you bought your home 10 years ago for $200,000 and now — even with current market conditions — it is worth $300,000. When you gift the house to your brother, your tax basis (which is $200,000) becomes the tax basis for your brother. (Of course, if you made any substantial improvements, that would increase the tax basis.)
So now, your brother’s tax basis is $200,000. Tax basis is important in determining profit. You take the purchase price, add any improvements to get an adjusted tax basis. Then you take the sales price, deduct any expenses such as real estate commissions, to get the adjusted sales price. The difference between the adjusted sales price and the adjusted tax basis is profit.
Let’s say your brother decides to sell immediately for $300,000 and, for this discussion, ignoring expenses, his gain is $100,000 ($300,000 minus $200,000). In that case, unless he has held the property for at least 12 months, he will have to pay income tax based on his ordinary tax rate. If he sells after one year, one of two scenarios can occur. If he has lived in and owned the property for two out of the five years before the property is sold, he can take advantage of the up-to-$500,000 exclusion of gain. If he is married, and files a joint tax return with his spouse, they can exclude up to $500,000 of their profit; on the other hand, if he is single (or files a separate tax return) he can exclude only up to $250,000 of his gain.
On the other hand, if he cannot meet the "use and occupancy" tests referenced above, then he will have to pay capital gains tax on his profit. In 2010, the maximum tax was 15 percent. Congress has extended this through 2012. If you are in the 10 or 15 percent income tax bracket, you do not have to pay any capital gains tax if you sell your investment property (or cannot meet the use and occupancy tests). All other taxpayers will still have to pay only 15 percent of the gain. Because next year is an election year — and Congress is so hopelessly divided (as of this writing) — no one can predict the future of the tax laws.
There is one additional factor to consider before gifting property. As discussed above, if you gift someone your home, your tax basis becomes their tax basis. On the other hand, if you die and leave the house to someone, that person gets what is known as the "stepped-up" basis. In other words, the value of the property at the time of death becomes the tax basis for the new owner.
In our example, if you die and leave your brother the house, which was valued at $300,000, if he sold it immediately for $300,000, he would have no gain and thus no tax to pay.
This is not complicated, but does require careful planning. Consult with your tax advisers before taking any action.
DEAR BENNY: After the passing of both parents, my wife and her sister now have a trust to divide equally. The trust consists of a $1 million home and $700,000. My wife wants the home, and her sister wants only the cash. How can they divide up the trust "equally" when day by day the value of the house keeps dropping and the value of the cash seems to appreciate? I worry that if my wife takes the home, she will become house-rich and cash-poor. –Paul
DEAR PAUL: The trustee of the trust will need to get an appraisal of the property. Appraisals are not an exact science so someone can also challenge and demand a second opinion. If the value of the house is still greater than the amount of cash available, then either the house would have to be sold and proceeds divided equally with the cash, or the sister wanting the home would have to buy the other sister out.
If for example, the house appraises at $900,000 and there is $700,000 in cash, then each would be entitled to $800,000 and the sister wanting the house would have to pay the other sister $100,000 out of her own funds to keep it. Perhaps the cash-taking sister would agree to a promissory note, secured with a deed of trust (also called mortgage in some states) against the house.
As for being "house-rich and cash-poor," that is something that you and your wife have to give serious thought about. If this is a concern, then perhaps you would be better off selling the house.
And there is really nothing that can be done about future depreciation. It is what it is. And a couple of years from now, the value of the house may actually start appreciating.
Bottom line: Discuss these issues with your attorneys. I say "attorneys" because one lawyer cannot represent both sides.
DEAR BENNY: I am the sole heir of my deceased mother. My mother and I lived in a house that is in her name. I am still residing in the house, but I would like to move.
From my understanding, I can hire a real estate attorney to provide me with an affidavit of heirship, so that I can sell this house and review the contract for the new real estate transaction. Is my understanding correct? Can you recommend any real estate attorneys? –Rhonda
DEAR RHONDA: First, I cannot recommend (or even suggest) any attorney (or any other professional for that matter) to assist you. To my knowledge, every state and many large cities have bar referral services. Contact your local bar association for assistance.
My answer to your question must be general in nature, as state laws and procedures differ. In general, however, you will most likely have to probate your mother’s estate. If she had a last will and testament, the probate judge will honor your mother’s intentions as spelled out in the will. If she did not have a will, the judge will follow your state statute as to how to distribute her assets. These statutes are referred to as "intestacy laws."
If you are the sole heir, then you should be able to inherit the house. Of course, if your mother had lots of debt that cannot be paid off from any of her other assets, then the house may have to be sold to satisfy those creditors.
You will need an attorney. Some real estate lawyers are experienced with probate, and some are not. So when you get some names of attorneys, make sure to ask them if they have handled probate matters and are comfortable with that process.
