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Exes consider selling paid-off home to their children

Ilyce Glink and Samuel J. Tamkin, Tribune Content Agency on

Q: My ex and I are thinking of selling our paid-off home to our two children. Then, both of us would purchase our own places. We would give them a much better deal than they could get on the open market. What are the pros and cons of doing this? Thanks in advance.

A: We wish you had included some additional information in your email. For example, how old are your (grown, we assume) children? Do they have spouses or significant others? Do they expect to live in the home or rent it out? Will only one of your kids live in the home and not the other? Is the house in a place where at least one child might want to stay permanently, or at least for 10 to 15 years?

Since we don’t know the ins and outs of your family situation, we’ll just start by saying this is an idea that could work well, depending on some of the timing and other issues and questions we just raised.

We assume you bought your marital residence a long time ago. It’s paid off, so the carrying costs (maintenance and taxes) should be relatively cheap. If your kids need an affordable place to live in their early adulthood, they don’t mind living together in this property, if it’s near enough to where they work (or they’re remote), if you and your ex don’t need much money out of this house (or are looking to transfer assets to your children), and if they can afford to buy the home or at least make mortgage, taxes and insurance payments on their current income, then it could make financial sense.

That’s a lot of ifs.

On the plus side, selling your house to your kids (as opposed to giving it to them) has a lot of benefits, especially if you’re going to hold the mortgage. You’ll get a higher rate of interest on your cash than you can almost anywhere else. You know the borrowers, so you should know if you can trust them to make regular payments. If something happens, and they miss a payment, you’ll help them avoid trashing their credit, unless you’re reporting those payments.

 

Buying a home from you does offer your kids a big leg up financially, especially since it’s so expensive to buy a house right now. Gen Zers and Millennials are having trouble qualifying because of high interest rates and sky-high housing prices. Allowing your kids to buy in at a lower rate and build equity will give them a boost financially, especially if you’re allowing them to lock in at a lower interest rate or you’re selling the home for less than you could get on the open market.

As Ilyce has written in her books, “The younger you are when you buy your first house, the wealthier you’ll be later in life.” We believe that to be true, and you’re helping your kids get there. They’ll realize appreciation on the house and hold down their cost-of-living expenses. That part is a win-win.

What about the down side? There is just one big one for you and your ex: You’ll get less cash out of this asset. If you’re property-rich and cash poor, you won’t be able to tap into the equity to buy your new separate homes. That may not be much of an issue, but it might be for others contemplating the same thing.

Also, while you and your ex-spouse can each keep up to $250,000 in profits tax free when you sell, you may owe tax on anything above that amount. You will also have to report income from the mortgage on your federal and state (if you have one) tax return. Finally, what happens when your kids want to refinance and pay off your mortgage? Will you be OK with that?

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