I need to transfer a SFH into my name. It’s from a relative and there are absolutely no issues with title, liens, etc.
However, I’m not sure of the best way to do this. There is NO mortgage on this property:
If I do a deed transfer for a $10 consideration, for example, and then I own the home. Would I still qualify for perks/benefits associated with being a first time home owner? Such as: No capital gains after 2 years of ownership, or the new $7,500 tax credit for this year.
Say the house was bought 2 months ago all cash for $100k. Instead of the $10 deed transfer, if I buy the house for the exact same price, $100k cash, then would that be a better approach?
These are my only two options. My main concerns are to make sure I am considered a first time home owner/buyer and qualify for all the associated benefits.
The owner is essentially giving you a $100K gift of equity. Your basis in the property will be the same as the owner’s basis – $100K in your example.
The federal income tax “refundable” credit of 10% of the purchase price or $7500 whichever is less, won’t apply to you either since your purchase price is essentially zero.
The person who gives you this property will have a federal gift tax consequence. Gifts are not taxable to the recipient.
With the second option,
Your initial cost basis will be the amount you pay for the property – $100K in your example. If you will use financing, loan programs for “first time” home buyers are available.
If you are a first time homeowner, you qualify for the federal income tax “refundable” credit of 10% of the purchase price or $7500 whichever is less. Since you are paying $100K for the property, your tax credit will be $7500, which you will have to pay back in equal installments over the next 15 years.
Regardless of which option you choose,
If you have not owned property in your name for at least the last three years, then you could be considered a first time homeowner.
When you sell this property, your profit will be your net sale proceeds minus your cost basis. If you meet the two year ownership and occupancy requirements for a primary residence, up to $250K of profit (per qualifying taxpayer) can be excluded from capital gains taxes.
All the tax benefits of home ownership are available to you. If your state has a property tax discount for owner occupied property, you can apply for that. On your federal income tax return, property taxes and mortgage interest deductions can be taken on Schedule A if you itemize.
I’m sure that I’ll go with option #2. However, in this case… the “$100k” won’t be entirely mine. I’ll have to borrow some money to pay all cash. So given that it’s not all coming from my account, does this change anything? Is it considered a gift? Do I even have to report it as not fully being my own money?
Borrowed money that has to be repaid is not income and is not a gift. You don’t have to “report” it.
Just making sure that you understand your options. I get the feeling that you are choosing option 2 so you can qualify for the $7500 interest free loan from the government. This is a loan, and an installment has to be repaid each year when you file your income tax return. To get the loan you have to buy a house and occupy it as your primary residence.
You will spend a lot more money in the long run for mortgage payments than you will receive in a tax free loan from the government.
Run some numbers. Set up a spreadsheet and project your monthly payments over the next 15 years with a mortgage payment (option 2) and with no mortgage payment (option 1). How much money will you spend in 15 years with each option?