“My parents are 70 years old. They retired in 2005 and built a home on a lake. The appraised value of the home in 2005 was $195,000. The appraised value today is $135,000 and they owe $140,000. Due to my father’s health my parents are now considering selling their home within the next 1-2 years. My two sisters and I are wondering if there is a vehicle/instrument that can be used for us to purchase the house (as a single entity) from them, allow our parents to stay in the home as long as they want and then we can use the home as a vacation home for our families? None of us wants to take over the mortgage individually. Advise?”
The short answer is yes, there is probably a method to accomplish what you are trying to do (keep your parents in their house for their lifetime, then share it amongst your siblings). The long answer is that there are numerous possible methods, and choosing the one that is right for you and your family, and which also avoids the most adverse consequences, will require some personalized legal advice.
There are several issues that you may not have considered, and which should factor into your decisions.
First, you do not want the mortgage to be called due because of the transfer. Most mortgages have what is called a “due on sale” clause, which allows the lender to demand immediate repayment when the property is sold or transferred. By Federal law, however, there are certain transfers which are exceptions to that rule, one of which is transfers between family members. However, if your parents transfer the property to an entity (rather than to their children directly), in some situations the lender could argue that it does not qualify as a family transfer, and call in the loan.
Admittedly, this is not likely from a practical standpoint as long as the mortgage is being paid and the property is underwater (since the lender would have little to gain), but it is a risk you should be aware of.
Second, depending on where the property is, there may be different effects on your property taxes depending on how the property is transferred and held. This is something you will need to consult with local counsel on.
Third, and perhaps most importantly, any time you co-own property, it is critical that you have some sort of co-ownership agreement setting forth the parties’ relative rights and obligations relating to the property. For example, what happens if two or all three of you want to use the house to vacation in on the same weekend? If one of you uses it more often than the others, will that sibling pay a greater percentage of the costs, or will you all pay equal amounts regardless of use? What if one of you wants out of the property in a few years, or dies? These are just a few of the questions that should be addressed before you co-own property.
And there are other considerations, both tax and nontax, that should be looked at before deciding how to move forward. While there are a lot of things to consider, I don’t want to scare you off from exploring this option, since a good attorney should be able to recommend one or two vehicles which will best accomplish your goals. What I am saying is, this decision is complicated enough that consulting with a good attorney is well worth the cost.