House transfer to grandson

What is the name of your state? PA

I wish to purchase my grandparents house. We have agreed on a price and I was trying to aviod sales taxes, closing costs etc. After talking to a lender they said to transfer the house to my for a dollar and take out a second mortage. Would this work so that I wouldn't have to pay sales tax? Also would I be able to deduct the interest from my federal income tax since this was a different type of mortgage? Finally, when I eventually sold the house would I have to pay capital gains.

Lots of questions please help.

You'll have to pay the transfer taxes. However, a private sale need not generate any other closing costs. But I'd recommend your go through an escrow company simply because you need to have title insurance & a clean record of ownership if you want to sell later. It shouldn't cost you more than a couple thousand.

If the price you agreed on is below market, your GPs may need to file a gift tax return. For example, if the house is worth $200k & they sell to you for $100k, they have to report the other $100k as a gift to you.

Your basis is whatever you actually pay for the house.

Thanks for your reply. Another post said setting up a trust might be better. How would that work and how would that be better than a title transfer?

They are going to sell for slightly less than market value. If it is close enough do they still have to claim the gift tax (say within $10,000)? Do you go by tax assesments for value or a private assers value?

I am assuming by your post that I wouldn't have to pay sales tax. What are these transfer taxes? I was originally going to transfer the house for $1 and take out a second mortgage. Does that affect taxes?

1. A living trust is a way to avoid probate and still get the step up in basis for the property. The trust is created & the house is conveyed to the trust. The trust spells out who lives in the house, pays the expenses, etc. Your GPs would be the original trustees, the survivor would be the successor trustee, and you or someone else would be the 3rd & final trustee. After both GPs pass away, the final trustee transfers the house to you. Your basis is the house's FMV on the day of transfer.

Since you are buying the house for almost FMV, a living trust is probably not the best solution. You won't be able to sell the house because you won't be the owner.

2. Use the fair market value. Tax assessments are often inflated or deflated & can differ radically from what the house would actually bring on the open market.

3. As long as the discount is less than $22,000 ($11,000 per donor), neither GP will have to file a gift tax return.

4. You'll have to pay the sales/excise taxes. Even if you transfer the house for "$1", the county will tax you as if you bought it for FMV. The county will be less likely to challenge the actual sales price if it's at least near the FMV.