The Moneyist
‘My wife and I are very grateful’: Our son wants to pay off our mortgage before we retire. Will this backfire?
‘He’s also the executor of our will’
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Dear Quentin,
My wife and I are 60. We have roughly $130,000 left on our mortgage, on a house valued at $400,000. Our son wants to pay off the mortgage so that we can live mortgage-free as we enter into retirement in the next few years. He’s also the executor of our will. My wife and I are very grateful.
We want to leave the house to him and his three siblings upon our death. Should we put the home in a trust or in our will? We want to maintain control of our house while we are alive and allow him to pay off the mortgage as soon as possible, but we are afraid either he or we will get hit with a gift tax.
Father
Dear Father,
You can do all of the above — accept your son’s kind offer and leave your home to your four children without incurring a hefty tax bill.
Before I get into the weeds of the gift tax and capital-gains tax, all of which should be pretty straightforward, I would like to congratulate you and your wife on raising such a generous son. It’s nice to read a letter from a family where the adult children are offering financial support instead of the other way around.
First off, you need to decide whether to accept your son’s offer. He wants to do something nice for you, and he can obviously afford to do it. You could, in return, leave him a larger share of your home to make up for the $130,000 he will spend to pay off your mortgage. If he says, “It’s a gift. Split the house four ways,” take him at his word.
Your son can give you $19,000 a year without having to file paperwork with the Internal Revenue Service or pay taxes on that. A couple — in other words, he and his spouse, if he’s married — can give twice that amount. If he gives you $130,000 all at once, he will have to file a form with the IRS to declare that he is using some of his lifetime federal estate-tax exclusion, which is just shy of $14 million. So far, so good.
You could, in return, leave him a larger share of your home to make up for the $130,000 he will spend to pay off your mortgage.
Your options are to put the house in a trust (which would be more expensive and require more paperwork, including appointing a trustee), to make a will or to set up a transfer-on-death deed. In the latter case, your four children would automatically assume ownership after your death – the advantage being that your property would not go through a potentially lengthy probate process.
As you may be aware, assets inherited by children are typically passed on through a “step-up in basis,” which means that capital gains are based on the property’s current value, rather than the original purchase price. For this reason, it’s almost always a bad idea for parents to add children to the deed of their home.
Current law allows for single tax-filers to exclude $250,000 in capital gains on primary residences; joint filers can exclude $500,000. Capital-gains taxes are levied at both the federal and state level, so these will depend on where you live. Long-term federal capital gains for a home owned for over a year are taxed at either 0%, 15% or 20%, depending on your tax bracket.
This is a good problem to have. Usually, letters to this column relate to family members trying to steal money, not give it away.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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