Is it legal to just pay $10.00 for a $500,000.00 house if you are
buying it from a family member?  Example, seller is the Mother and
buyer is youngest son.

Hello and thank you for your question.

It is certainly legal, and Mother (the seller) is making a gift of the
value of the house to her son (the buyer).

Be sure to record the deed, and do indicate on the recording form that
the transfer is by gift (you can disregard the $10 for this purpose). 
Most states (I'm assuming you're in the U.S.) do not charge real
estate transfer tax on a gift deed, which will save several thousand
dollars on the transfer.

To avoid problems on a future sale of the house by the son, you should
also get a copy of the title insurance policy (in some states this
might be an attorney's title opinion rather than an insurance policy)
and inquire about updating it to name the son (this probably requires
an additional fee).

Most states do not tax gifts (you should telephone or check the
website of your state tax department to verify this).

The mother is required to file a U.S. gift tax return, due April 15
following the year of the gift.  No tax will be due, unless this gift
combined with all her prior taxable gifts exceeds $1,000,000 but the
form must be filed.  In determining whether she has passed the
$1,000,0000 threshold, you can ignore individual annual exclusion
gifts up to $10,000 or $11,000.

Here is the federal gift tax form and instructions:
http://www.irs.gov/pub/irs-pdf/f709.pdf
http://www.irs.gov/pub/irs-pdf/i709.pdf

There is no income tax on gifts.
Internal Revenue Code Section 102(a)
"Gross income does not include the value of property acquired by gift,
bequest, devise or inheritance."
http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000102----000-.html

By the way, if the mother is continuing to live in the house
rent-free, the value of the house will be counted as an estate asset
at her death.  This could be bad or good, depending on the
circumstances (bad if she is wealthy enough to incur estate taxes;
good because if the son sells the house after her death, he will be
able to use $500,000 or so and not $10 as his 'cost' basis in
computing capital gains tax on his sale).


Search term used:
709 site:irs.gov
102(a) gift bequest

Thanks again for bringing us your question.

Sincerely,
Google Answers Researcher
Richard-ga

---

Clarification of Answer by richard-ga on 31 Dec 2005 05:45 PST

Hello again:

Please disregard Mr. Siliconsamurai's comment.  It is absolutely not a
felony (nor any other sort of crime or violation) to make a gift in
contemplation of applying for Medicaid.  One simply needs to apply at
the proper time and disclose the gift on the application.  In your
case the mother could qualify for Medicaid no sooner than 36 months
after making the gift.
http://www.tn-elderlaw.com/medicaidmyths.html

Richard-ga

Yep. you can pay .47 cents for it is you want! (.47 cents is
arbitrary...) As long as the seller is not pressured into seeling the
home for under value or pushed into the sale in a ny way it is
completely legal for a home to be sold at whatever price he or she so
chooses.  The owner can actually give it away if they want, but I
wouldn't recommend it because I think gift taxes apply depending on
the state statutes.  I would recommend setting up a brief consultation
with a real estate lawyer jsut to have them run over the paperwork and
ensure that everything looks kosher.  It will probably cost you quite
a bit per hour, but it shouldn't take very long...it probably isn't a
nessesity either as long as there aren't any disgruntled family
members but a little extra precaution never hurt anyone especially in
family matters!

Many years ago my ex-husband and I were renting a house.  The owners
didn't want to bother with it anymore and told us we could buy it for
$65.00!  And we did.  :)

As with all advice - you probably want to talk to a profession about
your specific situation.  I am not a laywer or accountant, use this
information at your own risk.

With that said, if you buy a house for significantly less than it is
worth from a family member, you will be subject to gift taxes.

From the IRS:
http://www.irs.gov/businesses/small/article/0,,id=108139,00.html


"The gift tax is a tax on the transfer of property by one individual
to another while receiving nothing, or less than full value, in
return. The tax applies whether the donor intends the transfer to be a
gift or not."

"The donor is generally responsible for paying the gift tax. Under
special arrangements the donee may agree to pay the tax instead.
Please visit with your tax professional if you are considering this
type of arrangement."

Q: What is considered a gift?

Any transfer to an individual, either directly or indirectly, where
full consideration (measured in money or money's worth) is not
received in return.

Q: What can be excluded from gifts?

The general rule is that any gift is a taxable gift. However, there
are many exceptions to this rule. Generally, the following gifts are
not taxable gifts.

1. Gifts that are not more than the annual exclusion for the calendar year.
2. Tuition or medical expenses you pay for someone (the educational
and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from
the value of the gift(s) made.

I?m not certain if anyone mentioned intent. If this sale is being
contemplated to qualify the mother for Medicaid or other assistance,
then it is a felony.

People try this sort of thing all the time but the agencies go back 5
years and look at what happened to any assets.

I know someone with a felony record now because he did exactly what
you propose but with the aim of hiding his mother?s assets.

If that isn't the intent then there shouldn't be any problem but if
something happens in the future you need to be aware that the State
won't assume an innocent mistake unless you report it when she applies
for assistance.

REALLY check with a lawyer and explain everything involved to him/her.

With all these comments about being able to do anything you want, I
thought it might be of interest to you to know that there are some
common circumstances where you need to consult a lawyer to avoid
violating the law.

"It is absolutely not a felony (nor any other sort of crime or
violation) to make a gift in contemplation of applying for Medicaid."
Well, with all due respect to Mr. Richard, actually, it IS a crime
unless you do it just right, at least according to the law firm I use
and the friend I mentioned who is still on probation.

As I said, you just have to report it when applying for assistance -
if you don't, then it certainly is a felony in Pennsylvania, at least
according to the State Atty. General and the courts.

I did say "the State won't assume an innocent mistake UNLESS you
report it when she applies for assistance." I thought that was pretty
good advice, but I may be wrong.

And, it is 5 years for some asset classes, not always 3 so, as I
suggested, you really need to check something like this with a lawyer
unless you are absolutely certain you know all the applicable laws in
detail.

For example,
http://www.manaela.org/aboutus/elderlaw.cfm

"Medicaid reviews all financial records for the 36 months prior to
application (60 months in certain cases involving trusts). The
purposed of this "look-back" period is to determine if any transfers
were made which might disqualify the applicant from receiving
benefits. A disqualifying transfer will exist if during this period
the applicant or spouse transferred a countable asset or the principal
residence for less than fair market value.?

"Not all gifts cause a 36-month disqualification! The amount of the
gift determines the length of disqualification and data of
eligibility. Also, in special circumstances the gift causes no
disqualification at all!"

"Sometimes, a carefully planned program of disqualifying transfers can
be of long-term benefit to the nursing home resident, his or her
spouse, and family. Such gifting should, however, only be undertaken
with the advice and assistance of an elder law attorney."


You might also want to check out
http://smithandhaskell.lawoffice.com/articles/article-01.pdf

I was only pointing out that IF this is being done for medicare or
medicaid purposes you need to be extremely careful - if you try to
hide the transaction it is definately illegal and the lookback period
is up to five years, not just 3 years. If you report it, then it is
merely a disqualifying gift.

Mr. Richard's other comments about tax and gift rules are right on the
money but I thought it was important to warn you about the possible
legal problems even though we don't give legal advice here.


And, if there is no such intent, then this is not of any concern to
the questioner, but you didn't specify why the house was being sold
and, when dealing with criminal law (fraud) I feel it is always better
to be safe now than sorry later.

Also, of course, circumstances change and if something unfortunate
happens in the future you need to be aware of possible problems so you
can avoid them simply and easily.


But feel free to disregard my comments if you want to I certainly
didn't want to stir up any problems in trying to avoid them - I just
thought it was an important point worth mentioning.

couple questions regarding this:
1) i'm assuming this can work between siblings as well, right?
2) what if there's still a mortgage on the house and the recipient has
agreed to be responsible for the remaining balance and interest?  does
that complicate the transfer instead of simply being a gift?

Hi attgig, is that a new question? 

I see you are new here so I thought I should mantion that researchers
get paid only if you post a question so you need to post that as a
question with a price.

Good luck and welcome to google answers