Grandmas House in Mountain View CA Quitclaim Deed then Refi?

Question

We are entertaining the idea of purchasing my fiancee's grandmother's home in Mountain View, CA. This house is in a PRIME location, walking distance to google. COMPS are going for 1.2-1.4 mil ARV. We want to present the best proposition to both parties, she is our grandmother of course.

Currently:

-The Mountain View house is being rented to family.

-We are renting a room from her in the San Jose home she lives in. Her Mountain View home is being rented by family, but we would switch places upon taking ownership.

-The Mountain View house is paid off.

-There is a mortgage on the San Jose house.

Her Wants:

-Keep the property within the family rather than sell it, but would ultimately sell it if her kids don't want to purchase the house (let's assume none can purchase).

-Avoid capital gains taxes as much as possible.

Our Wants:

-House hack- either renting rooms, renting the house, AirBnB, Build an ADU - The more privacy the better

-Find a price that works. We are thinking in the range of 600-700k. Her capital gains would literally be over 200k in taxes should she sell it on the market other wise.

-Build equity to leverage for future investments

Are there any legal ramifications if she Quitclaim/Quickclaim Deeds us into the property, and we cash out Refi money and essentially use that to buy her out? Are there Pros and Cons to this and is there a better way to do this?

Katie L. · Answer

@Eidref Laxa

"Inherit" generally only happens after someone dies.  If she's giving it to you during life then it's likely a gift.  There are tax laws governing both inheritance and gifts that you will want to familiarize yourself with.  Each one comes with very different rules for the basis you would receive in the property, ultimately governing YOUR capital gain or loss on eventual sale, so the difference can be pretty big depending on what Grandma originally paid for the property.  The refinance you're talking about also likely has gift tax consequences as well, particularly so if you're going to formally record deeds to that effect.

Again, I don't have all the facts, so do NOT take this as formal legal or tax advice because I do not intend it to be so. Generally, let's say... house is worth 1.2m with no debt. Let's say Grandma bought it for 500k. If she gifts the house to you without any debt, that's a 1.2 m gift and you take a 500k carryover basis... meaning when you sell the property, you'll take the cash you receive and subtract out 500k and you'll pay capital gains on the difference (barring no 121 exclusion). Grandma will need to file a gift tax return. She can gift up to $14k per year per donee (presumably you and your girlfriend each for $28k but if going to just the girlfriend then only $14k) free of tax consequences. The balance above 14k/28k eats into Grandma's lifetime exclusion which I have no idea if Grandma has gifted before or what her estate is roughly worth.

If instead she dies owning the property and gives it to you at death, you get 1.2m property, but you also get a step up in basis to the current fair market value.  So if it's worth 1.2m when she dies, you get a new basis of 1.2 m so that when you eventually sell it, you're taking your sales proceeds less 1.2m (instead of 500k above for a gift) to compute capital gains on the sale.  But, if she dies with the entire property at death, it is included in her estate for estate tax purposes, eating into her lifetime exclusion and no annual 14k exclusion to lower the value.  Again, I don't know the grandma's net worth to know which makes the most sense so I won't comment.

But to answer your question, no, you cannot inherit something while Grandma is still living.  She can outline in her estate plan for you to eventually inherit it, but if you're taking ownership during her lifetime, it's a gift or sale or some other transfer but not an inheritance if the person is still alive.

Also, as I said before, you may want to look into property tax consequences as well.  See what the house is worth under the county it registered under and compare that to the current fair market value.  If you don't transfer it using some exclusions, the house could get reassessed for property tax purposes which can add up to be significant value as well.

*This is not legal, tax, or other professional advice.

Steven Hamilton II · Answer

If you want to avoid the tax consequences then you want to inherit it. So look at a master lease. She cannot transfer title while she is living or there are tax consequences.

She can refinance while she is living to utilize the cash and then you would inherit it subject to the loan after her passing.

Feel free to reach out if you would like some detailed advice.

Account Closed · Answer

First to "Avoid capital gains taxes as much as possible." talk to a tax lawyer. If you buy the house, she may be on the hook for some huuuge taxes. If you inherit the house, there may not be any taxes.

Maybe a Lease Option with a 25 year Option is the way to go.

If she Quit Claims there could be all sorts of problems. She will probably have taxes due (think 25% to 30%)  so about $150,000 to $200,000 plus the nasty California taxes. Plus the Title Company will probably have a tough time insuring the title, and there may be a 6 month seasoning period before you can get a loan and you have no "guarantee" of qualifying for the loan anyway.   You need an estate planning attorney and a real estate attorney. And as Lucy says in the Charlie Brown series, "Advice is $ 0.25" so feel free to send $0.25 to the Salvation Army for this "Free" advice that just saved you tens of thousands of dollars and from doing something you'd long regret.

Eidref Laxa · Answer

This is probably the only rote to cash flow with this type of purchase. Corporate housing via Airbnb is quite possibly the best  strategy. Let's talk after I solidify a plan.

Matt K. · Answer

What about a long term lease that just so happened to match the payment of the refi.....

Steven Hamilton II · Answer

Please understand that if you keep title as is and it is inherited the assessment will not increase drastically. You do not want to purchase it from her as that will trigger Capital gains. WAIT and inherit the property.

She will have an exclusion for the sale of 250k. but that is the only thing she would benefit from.

Don't make drastic moves without understanding fully what the ramifications are.

Katie L. · Answer

@Eidref Laxa

Don't have a full picture so will refrain from giving any advice but here's some things to maybe look into: gifting the house, putting it into an entity, putting it into a trust (maybe a QPRT?), installment sales, 1031 exchange, Grandma keeping until death to get step-up in basis....

Aside from capital gains taxes on a sale, you could have some very large property tax ramifications if the property isn't assessed very high currently and it changes ownership, which is something else you might want to think about in how you do the transfer, particularly in CA using some of the exclusions.

Just some food for thought...

Eidref Laxa · Answer

So we want to "inherit" the property while she is living- maybe I'm not using the right word here. Maybe we just do a refinance on that house, take however much she wants, and we can just pay that off. Then when she passes, she can leave us the house in her will? What do you think of that?

**We want to avoid buying the house out right to avoid the taxes** So far, I'm reading that if she were to deed the house to us, she will still have to pay taxes? Taxes on what? the appraised value of the house?

I don't think she wants to do the 1031, but my fiancee and I might do that in the future.

@Steven Hamilton II @Katie Lepore Account Closed

Tyler Work · Answer

@Eidref Laxa have you looked up your local Airbnb laws?  Here in Denver you can make HUGE money by building an ADU and renting it out on Airbnb, even with our "primary residence" rule.  I can help you out if you decide to go this route.

Matt K. · Answer

Wouldn't the lease terminate if you inherited the property and you'd take over the outstanding balance?

Grandmas House in Mountain View CA Quitclaim Deed then Refi?

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