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Family Buying Matters

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Posted On: 12/17/2014

QUESTION:

My husband and I are thinking of going in together with our son and his wife to buy a vacation home. We will put $150,000, down and they will pay the rest in the form of a $300,000 mortgage. What are the pros and cons other than family issues?

ANSWER:

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The idea of buying real estate with relatives sounds enticing, but “family issues” cannot be avoided because they’re at the heart of the transaction.

You have a $450,000 property with $150,000 in cash from you and a $300,000 mortgage to be paid by your son and daughter-in-law. However, will your names also be on the note, making you a co-signer and fully responsible for the debt?

How is property ownership to be titled? Will there be a right of survivorship?

How are ownership interests to be divided? Will everyone have 25-percent ownership or should there be a different formula? Are the costs for such things as HOA fees and repairs to be divided according to ownership, equally, or in some other way?

What if someone wants to sell and everyone else wants to hold? Can an interest in the property be sold to an outside party or must it first be offered to current owners?

If the property is sold, how are the profits divided? What if there’s a loss?

And – I hate to ask – what if there’s a divorce? People of all ages, including people in long-term relationships, get divorced, an event which can set off a variety of property issues.

By any chance do you have other children? If you were to pass away would another child get ownership in the property?

What these questions suggest is that there’s no such thing as a “plain and simple” family purchase. The issue is not just family dynamics, rather it’s also the way the world requires us to deal with property issues.

Plainly, before going further, you will need to speak with an attorney and tax professional. Each of the four prospective owners will need a will, a living will and other paperwork as your legal counsel suggests.

You also will want to structure ownership in a way that’s best for tax purposes. For instance, maybe you want an “equity sharing” arrangement.

With equity sharing there’s a resident owner and a non-resident owner, an investor. Imagine that for your $150,000 you become the non-resident owner with a 50 percent stake in the property. Your son and his wife would then own half and pay rent for the half he doesn’t own. The advantage to you is that as an investor you can depreciate your half of the property and thus reduce your federal income taxes.

I know it doesn’t sound very family-friendly to think about wills, lawyers and taxes, but that’s the nature of modern property ownership – even when the ownership is among parents and children. Things change and questions arise, especially over the long term, and it is simply easier and cheaper to get issues sorted out now rather than later.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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