buying or being given a house right after BK

[bigtim6656]

I know buying one is not a big issue but what about say a parent giving you one.

My mom and dad bough a house at a tax sale. The plan was they would fix it and rent it to some people we know who work for them.
The guy has since been fired and will not be renting the house. Dad told me if I wanted I could move into it when they get it done in feb. We did no talk about money or buying it on a contract or anything.

I will be filing next month and hoping for discharge by dec. So if I get discharged and am lucky enough that they give me he house how will that go over should the trustee come back asking questions. Or am I ok after discharge.

[tobee43]

yikes...first of all from what little i know you'd have to pay taxes on the "gain" of the house...

each year a parent can deed you or transfer from their trust 10k per child...or those that would be inheriting their estate. if you r married then they can turn over 10k to you and 10k to your spouse...per year...until finally you have "full" ownership of that property.

in the meantime, if your bk is not settled at the time you want to move in. i would just ask them (your parents) if you could live there and just pay the expenses...that way they would not have to claim what you pay them as rental income...so it would not increase their income where it may become taxable and cause complexity in their personal taxes..ie...with rental property (depreciation etc).

if not, you could subject you and yours to really complex legal issues ...i think...please someone correct me if i am wrong. i would also review this with a accountant as well as an estate attorney....and don't leave out your bk attorney on this one either!

[BKDefender]

I'm definitely NOT a tax attorney or tax expert, so check with your tax preparer, accountant, or tax attorney and don't take my information as gospel.

There are two income tax exemptions for gifts.

First is the annual limit - $13k/yr from one person to another (it used to be $10k years ago, it is presently $13k/yr.) In this case your mom and dad could each give you a total of $26k each year. They could also give your spouse $26k total each year ($52k total/yr.) You should document that there is a transfer of Mom->you, Dad->you, Mom->spouse, Dad->spouse. If you want to get creative, they can sell you the home with owner financing at the Applicable Federal Rate (AFR - currently at 3.79% as of August 2010.) You don't pay anything on the note and each year they write-off the interest & principal up to the maximum $52k/year until you own the house free and clear (same thing - document four $13k transfers just in case you're audited.) That puts you within the annual exclusion limits.

Or if you want to make it easy, just have them give it to you and file a form 709 gift tax return claiming the full value as a gift to you. I'm assuming the house is worth less than $3.5M so the tax would be less than $1.455M? If so, then they declare it as a gift to you, file form 709, and you claim it as non-taxable gift income on your tax return as well. It reduces your parents' lifetime estate gift allowance but most people don't give away that much money each year anyway.

Although, I think that the estate tax was repealed in 2010 and hasn't been re-instated, so theoretically there may not be a $3.5M limit.

--William

[tobee43]

bk....well, then my question, which perhaps, i misunderstood, had to do with during...the time of bigtim's bankruptcy.

would not the trustee take into consideration that "gift" as an asset, and insist it be sold to pay the creditors???

i don't think the questions was the tax issues i brought up per sa, as much as if the property would be protected during and before a bankruptcy???

[BKDefender]

tobee43 - it depends on what exemptions there are in bigtim's state.
In Nevada, if the person owns the house less than 1,215 days then we only get $125k homestead exemption, compared to Nevada's $550k homestead exemption. So if a client of mine was gifted a home worth less than $125k and filed a homestead immediately, then, although the trustee might not like it, tough - client keeps it.

BUT having said that - your suggestion avoids the chance of a fight with the trustee (which is adviseable) - just move into the house, pay expenses, and when the bankruptcy is administratively closed, have the parents gift the house.

--William

[tobee43]

thank you bk...you just made me feel like the paralegal cert i rec'd at bu is not for "naught" lol!! and, of course, i would also never give any legal advise...only an opionion...for what that may be worth, if nothing at all.

in the state i was from there is no homestead exemptions....you can guess on the few that are such creditor "friendly" states i'm sure!

you hiring?? LOL!!!

[bigtim6656]

indiana here guys. Thanks for the info. My worry was more the bk and no taxes. though you make a good point. So it sounds like after my discharge I am ok with it being a gift or a purchase.

[backtoschool]

indiana here guys. Thanks for the info. My worry was more the bk and no taxes. though you make a good point. So it sounds like after my discharge I am ok with it being a gift or a purchase.

I would wait until after discharge and after your case administratively closes to have the property put into your name. (discharge and closing are two different stages of bankruptcy. Closing happens after you are discharged). If you have the property put into your name before your case administratively closes, you run the risk that the case could be reopened if the trustee finds out about the new asset.