All-in-the-Family Home Financing

Q. We want to sell one of our rental properties to our son, who is currently living in the house. He does not have enough money for the down payment, but he has a good job and will be able to make the monthly mortgage payment. How can we structure a sale that does not require him to put up any money? The house is worth $220,000 and the outstanding mortgage is $95,000. Our son is willing to get a new mortgage for 80% of the home’s value.-- A.P.O .

A. You have three basic choices, all of which require that you put up some money.

If your lender cooperates, you can allow your son to take over payments on the existing mortgage. You could then take back a second trust deed for the difference between the sale price and first mortgage.

If you must get a new mortgage on the house, your choices are either to give your son the money for the down payment or loan it to him. If your son is married, you and your husband could each give $20,000 to your son and his wife without triggering any gift tax consequences. This would provide them with the standard 20% down payment on a $200,000 home.

If you don’t want to give away any money, you could lend your son the money for the down payment and take back a second trust deed on the home for that amount. Be prepared to write what is called a “gift letter” explaining to your son’s mortgage lender that you have made a “gift loan” of the down payment and expect to be repaid.

Tax Basis for Gift Is Purchase Price

Q. I am giving my niece 100 shares of stock for which I paid $35 per share a year ago. Today’s price is $80 per share. Must I report this to the IRS? When my niece sells the shares, will her tax be based on the $35-per-share purchase price or the $80-per-share transfer value?-- A.S.

A. You need not report anything to the IRS now. Your gift, which is valued at $8,000, is worth less than the $10,000 that taxpayers are allowed to give each other every year without triggering gift tax implications. When your niece sells the shares, she should use the $35-per-share purchase price to figure her taxable gain. Gifts carry the original tax basis of the donor, not their value at the time of transfer. You can imagine how assets would be passed around if Uncle Sam allowed the tax basis to be based on the assets’ value at the time of transfer!

Using Savings Bonds for Tax-Free Tuition

Q. I would like to purchase $10,000 EE Savings Bonds for each of my grandchildren. Am I permitted to list the children as the bondholders and their parents as beneficiaries? Also, is a $10,000 bond, which actually costs only $5,000 at purchase, considered a gift of $5,000 or $10,000?-- V.M.H .

A. You may register the bonds in your grandchildren’s names, with their parents as beneficiaries. However, if you want your grandchildren to use the bond proceeds on a completely tax-free basis for their college educations, you must register the bonds in the names of their parents.

However, you should understand at the outset that not everyone qualifies for the College Saver bond plan. Eligibility depends on the income level of the family at the time the bonds are redeemed. Currently, taxpayers filing individual returns are entitled to a full federal tax break--the bonds are already exempt from state taxes--on the bond proceeds if their adjusted gross income is less than $44,150. Individual filers with an adjusted gross income of between $44,150 and $59,150 are entitled to a partial and gradually declining tax break.

Couples filing joint returns must have an adjusted gross income of less than $66,200 to take full advantage of the federal tax break. Partial tax breaks are available for couples with adjusted gross incomes between $66,200 and $96,200. These income limits are adjusted annually by a cost-of-living index and are likely to rise over the years that the bonds are held.

Finally, the bonds are considered a gift of $5,000--the amount you paid for them, not their value at maturity.

Factors to Consider in Paying Off Mortgage

Q. I am 70 years old and retired. Thanks to a recent inheritance, I can afford to pay off my $150,000 home mortgage that has a 7.5% interest rate. Should I?-- P.D.W.

A. You haven’t given us some key information--your annual income and where your other investments are held, for starters--that would permit a thorough analysis. But you should consider the following points carefully:

* Can you afford to tie up an additional $150,000 in a non-interest-bearing investment such as your home?

* Can you afford an investment as illiquid as real estate?

* What effect will the loss of the mortgage interest deduction have on your income tax obligation?

* Will you face any penalties for paying off your mortgage early?

* Do you believe 7.5% is the best your money can earn, pretax, over the life of your mortgage?

If you pay off the mortgage, you are essentially investing your money at 7.5%. Assuming you are in the top federal and California tax brackets--a cumulative rate of about 35%--the effective rate of your mortgage is 4.875%. So the question comes down to: Can you earn more than about 5% after-tax with the same risk as investing in your own home?

Today, the answer has to be no. However, current low interest rates won’t last forever; inflation is bound to pick up. But given your age and the likelihood that you are already or soon will be on a fixed income, you may want the security of knowing that your mortgage is completely paid off. That’s what our experts vote for.