Tax questions on transferring ownership of a SFH.

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:

  1. 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.

  2. 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.

What’s the best way to go about doing this?

In the first option,

  • 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.

Great…Great…Great… POST!

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?

Is option 2 the one you really want to do?