18 Oct We’re giving our house to our son. Will this strategy work?

Q. My wife and I own a single family home that is occupied and used by our son, who is single. At some point it is our intention to just turn the home over to him. We were advised to create a “mortgage sinking fund” to which we contribute about $15,000 each year from each of us. The account is worth about $230,000. We want to keep funding it until it’s worth $350,000, which is the current value of the property. At that point our son would give us the value of the account and we would give him the deed. This account is in his name and Social Security number. Does this make sense?
— Dad

A. It’s an interesting idea.

To fund the account, you used the gifting maximum of $15,000 each year for each of you.

From a tax perspective, when your son “purchases” the home from you for that accumulated amount, it should not be a taxable event, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“As a married couple, you can have up to $500,000 of gain in the home without paying any capital gains,” she said. “Since it’s valued beneath that amount, you should not have to pay any capital gains tax.”

When your son purchases the home, it will be debt free for him and he will assume the $350,000 of cost basis.

The only taxes that he might owe would be if there were capital gains in the account that holds the contributions, D’Agostini said.

She said this appears to be a good way to get the home out of your estate, and into your son’s ownership.

“You might want to have some assurance that he will in fact use the account for that purpose if your goal is to gift the home,” she said. “You might have a legal document prepared with the eventual purchase date and price in place. Life has a way of changing circumstances so make sure that he is on board with your plan.”

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This story was originally published on Oct. 18, 2019.

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