Is it legal to buy a house less than market value?

[Mrs Sully]

What is the name of your state? PA

My mom (59 yrs) owes money to the IRS, creditors and a home equity loan ($19K). Because she is chronically ill, her income isn't enough to meet her basic living expenses.

My uncle is willing to buy her house from her at below market value (which is about $125K). He'd like to buy it for around $90K. Then, she could live there rent free and have extra money to supplement her income.

Is buying a house at this much below market value legal?

[xylene]

Selling something for less than it is worth is a gift.

The gift is the difference between the value of the value of the item and the price.

In your case... that would be 125K - 90k = 35k. In that case mom would need to file a gift tax return... that DOES NOT mean that gift taxes will automatically be owed.

BUT. What you are talking about doing is NOT a gift. It is a life estate.

Mom should not do anything without talking to an estate planner.

It is obvious you are unsure of what you are getting into, and with mom being sick, you do not want to wait to seek an expert out.

[Zigner]

And just to elaborate a bit more...since you're dealing with the IRS (well, mom is), the rules are quite a bit more complex. Your scheme for your mom to avoid paying taxes that are already due may not fly for the IRS...

[tranquility]

Yes and no. You must get fair compensation for your property if a creditor comes calling. You can't dump assets to frustrate collections. At the same time, what is the fair market value for a residence subject to a life estate?

[Zigner]

Originally Posted by tranquility

Yes and no. You must get fair compensation for your property if a creditor comes calling. You can't dump assets to frustrate collections. At the same time, what is the fair market value for a residence subject to a life estate?

There is no life estate (presently)

[Mrs Sully]

We're not trying to avoid paying the creditors. The plan is to take the money from the sale to my uncle and pay off her IRS dues and her credit card debts and the home equity loan and leave the rest for her to supplement her income.

He wants to buy it for less than it's worth so that in the end when he needs to sell the house at some point (whether mom has to move in with family or passes) he doesn't lose money on the transaction. He's had room to pay property taxes, commissions, etc and still not lose.

Does that change anything?

[xylene]

No. This transaction, based on what you present is do-able. BUT

This is not a Do It Yourself job. You are describing a complicated transaction involving real estate. In itself that is needeing a lawyer.

Real estate that is subject to an equity lien and a tax lien. That really needs a pro.

You cannot afford to have a deal like this and not have every T dotted and I crossed.

Any mistakes and there would be boat loads of EXPENSIVE hassles.

Mom needs a lawyer or at least a very good estate planner to protect her interests.

Uncle needs own lawyer to protect his.

A handshake agreement and some homemade document stating "mom has the right to live here as long as she can." That just won't cut it.

[Mrs Sully]

Thanks for the info. I'm curious as to what kind of expensive hassles we'd be looking at.

[FarmerJ]

Just out of curiousity how much does the city or county say the home is worth for property taxation purposes ? Cant say for sure but if the house is sold for near what the county said it was worth I cant see there being alot of trouble over it.

[Grandma's house]

Chances are the IRS taxes are already a lien on the property. If not, they will be picked up right before the deal closes anyway when a lien search for taxes, judgements etc...is done against her social security number, and I promise you they will fine tooth comb her due to the differential in the purch. price and the appraised value. This is an underwriters RED FLAG...(especially in an arms length transaction such as this) The home equity line is SURELY a lien on title thus WILL be paid off. It isn't a CHOICE to pay these things, because these are liens. Since he is planning on buying the house and will likely need a mortgage correct? I assure you nothing is getting by anyone. The differential in the value and the purchase price is really not that significant but is enough to warrant an underwriter to handle the loan with prejudice as to what exactly IS going on. We are in such a declining market right now and WILL BE for the next couple of years. You have seen nothing yet... I doubt you realize that the equity you THINK is there really isn't anyway. Check it's value tomorrow. It will be even less. In 30 days even far less than tomorrow. FANNIE MAE just made some HUGE adjustments due to this in their lending policies. Regardless of the appraised value today, they are going to take 5% off the top anyway as we move along. They are also reducing their loan to value ratios 5% thus a total of 10% less than you COULD do today. By March 1st lending is going to be so tough and very ugly. Again...you will be surprised at what you think is the value and what it really is.
Come back when you've had an appraisal done. This deal can ACTUALLY be handled as a refinance if you had someone doing it right (since this is a relative) simply add him to title first...then do a refinance in his name. However if not his residence BY GOOD CLEAR DOCUMENTATION it isn't worth doing vs. a purchase. It saves his having to produce the down payment etc...ALSO the loan WILL be based off the purchase price NOT the appraised value (which ever is LESS) ..so he WILL have to pay a down paymt. Is he living IN the home?

[Grandma's house]

Originally Posted by FarmerJ

Just out of curiousity how much does the city or county say the home is worth for property taxation purposes ? Cant say for sure but if the house is sold for near what the county said it was worth I cant see there being alot of trouble over it.

This IS the biggest problems we are having in the industry right now. It seems nearly every county in the nation has INCREASED the property values when we know darn well the values are plumeting. I got my county to "drastically" reduce my taxes because I wrote them a letter demanding it. ALL should be doing this. Oh well...

I KNOW for certain they have NO issue of any gifting/taxing etc.....this is NOT a significant enough difference and is even less when they get their appraisal and they will see this. This I am certain of as well. There are MANY homes bought for less than their APPRAISED values. Christ..just look at the foreclosure sales going on. Homes worth 150k then sold for 75k. Do you REALLY think anyone is paying any GIFT TAX??? PALLEASE. IT AIN'T HAPPENING.

[Grandma's house]

Originally Posted by Mrs Sully

Thanks for the info. I'm curious as to what kind of expensive hassles we'd be looking at.

You don't need a lawyer. You need $450 (e) for an FHA appraisal. You need a phone call to a good lender FHA APPROVED FEDERAL BANK LENDER. The rest will fall in place!
The title co. and the lender will make darn sure this is done correctly.

All you gotta do is tell them this is a relative and the purch. price is less than your ANTICIPATED APPRAISED VALUE...LOL

[Mrs Sully]

Thanks for all the info Grandma's House.

My uncle lives in WA and mom is in PA. He would not be living in the house. Could you explain again what would need to be done to do this as a refinance? You said he'd have to be on the title. How do we do that? Does it cost to do it? Then, what would the benefit be to do that versus purchase? Also, could he be on the title with my mom to be able to do a refinance. Sorry, I'm new at all this so I need it in plain terms

Would mom have received information as to an IRS lien? She hasn't. Either way, the IRS is the main reason we are having to tap the equity somehow and not increase mom's monthly bills. We want to get the IRS paid.

[xylene]

Originally Posted by Mrs Sully

Thanks for the info. I'm curious as to what kind of expensive hassles we'd be looking at.

The status of the title could be complicated if not done correctly.

Also you want to protect mom, right.

What criteria will you use to determine when she is no longer able to live at the house?

Her Death? What if she is in a nursing home for years...

Nursing home? When is that temporary or permanent.

What if uncle dies?

What if the house burns down?

Who pays property taxes? What if that person fails to do so?

Who pays insurance? What if it lapses?

You need a life estate that is set up by a pro to protect your family.

I guess the principle expensive hassle you would want to avoid would be mom out on her ear when she can least afford it.

Your plan boils down to a short sale and relying on the good will of family.

That's not good enough for your mom.

---

Grandma

You are advising a woman with IRS problems and home equity line loan she can no longer afford to not seek professional advice in establishing a life estate.

That is a wee bit reckless.

Also, your statement about gift taxes is wrong. Correct advice would be for the poster to consult IRS publication 950 and ideally a professional to establish this life estate. Selling property for less than its value (esp in a not-arms-length) transaction is a gift, subject to gift tax filing, and gift taxes if any. The fact that some houses have lost value, and the mistakes some taxpayers make are not relevant. But of course you didn't even read that this poster is looking to establish a life estate, not necessarily make a gift... but since mom isn't sure of anything she still might have gift tax reporting (and possibly, but unlikely, some tax liability.)

Or tell them to guess to try and save a few hundred bucks.

[Mrs Sully]

The details of the situation is that mom has had a recurrence of cancer with metastis. We're not sure her life expectancy. Could be 1 year could be 3. Don't know until she completes several rounds of her treatment. She won't be put in a nursing home. Her options are to stay in her home in PA or move in with me and my family in NJ. Right now she wants to stay in her home in PA because her life is there and her drs are there. At this point she still has a life to live. The decision to have her move out at this point would be if/when she can't take care of herself any more (at which point, she would move with us and I'm sure wouldn't have much of a life expectancy and be on hospice care) or she can't afford to live there any more (if my uncle can't step in somehow) or she just decides she'd rather be here (which she's not choosing right now).

So, we're trying our best to figure out how she can stay in her home as long as she can and pay off her debt to the IRS.