For most people who dream of inheriting real estate, it will probably remain a dream. It’s only a reality for 2 to 7% of Americans, according to Federal Reserve data. (1)
But if you’re among the lucky few to inherit a home, there are legal and tax implications. Things get more complicated if the heir to the property then decides to sell it to another family member.
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Picture someone like Melissa, whose beloved grandmother passed away and left $300,000 each to Melissa and mom Nancy.
Melissa had expected to inherit her grandmother’s home. Her grandma always talked about passing it onto her, but the will was never updated to reflect that intention. So in the end, the family home passed to Melissa’s mother Nancy.
Nancy understood Melissa’s desire for the home and was happy to give it to her. They entered into a handshake deal so that Melissa could claim the home as her own and move in with her husband and kids.
In return, Melissa gave $200,000 of her inheritance to her mother.
The problem is, this real-estate transaction wouldn’t stand up in court, or if either of them ever wanted to sell the home. Nancy is still the legal owner.
Here are things for Melissa and Nancy to consider to legally transfer the property.
Making it legal
The only way to make it legal is to transfer title — legal right to the property — from Nancy to Melissa. And they need documented proof of that in the form of a deed.
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Hire a lawyer. First they need to engage a lawyer who specializes in estate and probate law, including the tax implications of transferring the property.
For example, a lawyer may be able to help Melissa and Nancy avoid the costly tax implications of transferring the $200,000 as a gift.
As it stands, when Melissa files her taxes, she must report the $200,000 cash gift she gave to her mother using Form 709. She may have to pay a gift tax of up to 40%. Melissa can work with the lawyer and a financial advisor to determine the best way to limit this impact. (2)
Quitclaim deed. Melissa and her mother also need to put to rest any concerns that Nancy will change her mind and claim the property as her own. One way to do this is with a quitclaim deed — a legal document in which the party transferring property (in this case, Nancy) relinquishes any future claim to it.
Closing the property. Their lawyer may advise a “sale” of the property through the $200,000 that has already changed hands or may instead advise a non-monetary transfer. Closing a property usually involves: (3)
- Setting up escrow. Escrow is a process in which a neutral third party (like the lawyer) holds the documents and funds involved in a real-estate sale until all conditions are met. If no funds are involved (as may be the case in a quitclaim deed transfer), this is not always necessary.
- Doing a title search. This formality will ensure that there are no issues like liens or encroachments on the property.
- Filing the deed. The county recorder’s office will file the new deed to make the transfer official.
- Paying taxes and fees. Transfer taxes, recording fees and other costs may be applicable, even if the property is transferred without a sale. The property may also be reassessed for property taxes. Capital gains tax may apply.
Melissa and Nancy must decide how to pay for any applicable costs. Will Nancy draw from Melissa’s $200,000 gift to pay for such costs? Or will Melissa be responsible for taxes and fees on top of the money she gave her mother?
They might want to consult with a financial advisor or real-estate professional who can make suggestions on an arrangement both parties will consider fair. (4)
While the entire process of legally transferring title and paying additional fees and taxes adds up financially, it’s worth it for peace of mind for both Melissa and her mother.
The next steps are Melissa’s alone. She should be aware of the long-term financial implications of homeownership, including property taxes, insurance, maintenance and more.
As the property is an older one, a home inspection may be a good idea to ensure there are no major issues.
How to avoid inheritance complications
This complex scenario is a reminder that keeping one’s will up to date is critical for ensuring your heirs can avoid headaches after you’re gone.
If you have big assets to transfer, like a home, cottage or significant investments, you should consider a living trust, which can help your heirs to avoid the lengthy (and sometimes costly) probate process, and also ensure that your will is less likely to be contested by your heirs after you pass.
The process for updating your will is usually fairly quick and can save a lot of time, not to mention money, down the road for your family.
Setting up a trust can be more lengthy and expensive, but offers you a better guarantee of the distribution of your property.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Federal Reserve (1); H&R Block (2); Runsensible (3); Donohue O’Connor & Riley (4)
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This article originally appeared on Moneywise.com under the title: I gave my mom $200K to buy my late grandma’s home from her — but there’s no proof it’s mine. How do we make it legal?
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