Real Estate Matters: Siblings seek guidance on ownership of vacation home inherited from father
Q: I read your column regularly and always find it very interesting and informative.
I have a rather complicated question: My brother and I inherited my father’s vacation home when he passed away. It was part of his trust. All of the assets of the trust have been distributed except this house. I want to sell it, and my brother wants to buy me out. Unfortunately, he has neither the money to buy it outright, nor good enough credit for a loan.
He proposes to give me a down payment and then pay me monthly for the balance. There is no existing mortgage on the house. I’m willing to do this, but even though he is trustworthy and I don’t believe that he will default on the loan, I want to make sure that I protect my interests. I also want to comply with IRS requirements and can properly close the trust.
What is the best way to go about this? Are there IRS rules for how much (or how little) interest I could charge him? What types of legal forms should I fill out to protect myself? Would we be able to close the trust if he still owes me money? Would we re-title the house in both our names until the loan is paid off? And how would I treat the down payment and monthly payment on my taxes? I appreciate any advice you could give me.
A: Thanks for your question. When reading your question we wondered why the issue of the home was not addressed before the other assets in the trust were distributed. If the trust had sufficient funds, you and your brother could have agreed to split the assets in the trust and included the home at that time. You could have ended up with more or all of the cash or investment assets from the trust and your brother could have ended up with the home.
You didn’t go that route, and it appears that the only asset left to divide between the two of you is the home. At the present time, the trust owns the home. In other words, the title holder to the home is the trust.
To close out the trust, you’d need to deed the home out of the trust and could deed it to your brother or to you and your brother jointly. Once the home is out of the trust, the trust would no longer have any assets. And, this leads us to the essence of your question as to how to handle the home and its future ownership.
You have quite a number of options on how both of you could own the home. You inherited the vacation home. If you sell the home within a year of the death of your father, you wouldn’t have any federal income taxes to pay on the profits of the sale. Since you inherited the home at the value at or around the time of your dad’s death, if you sell the home within a year, the value at the time of sale is considered by the IRS to be the inherited amount.
On the other hand, if you or your brother want to keep the home and then sell it down the line, you’d have taxes to pay on the profit on the difference between the home’s value when your dad died and the value of the home when you sell it.
You want to sell and your brother wants to buy, but can’t really afford it. So, here are some options. First, you could sell it to him on an installment basis and convey your ownership to him once he fully pays you what he owes. Or, you could sell him your half and take back a mortgage for the amount your brother owes you.