Sometimes, as people approach the inevitable, they start trying to get their things “in order”. They may even have a will, but they decide to transfer title to real estate prior to their death which could be an unnecessary expense for the would-be heir.
Generally, when property is passed through direction of a will, the heir will receive a stepped-up basis which means that the fair market value of the property at the time of death becomes the cost basis for the heir. If the property were sold for that fair market value, there would be no gain and no capital gains tax due.
However, if the property is gifted prior to death of the donor, along with the title to the property comes the cost basis of the property. The transfer of title does not trigger the capital gains tax but when the property is sold, the gain is calculated by subtracting the basis from the sales price leaving a capital gain subject to tax. In other words, the person receiving the gift does not get the stepped-up basis.
There certainly can be advantages to transferring the property prior to death. It completes the transfer without having to wait for the death and bypasses the probate process that might be required to settle the will. Another advantage to the donor may be to remove the property from the owner’s name which could lower the taxable estate.
Some owners may transfer title prior to death to qualify for Medicaid. The value of the asset may make them ineligible. It may trigger a Medicaid Transfer Penalty when the gift is made within five years and the basis of the property is less than fair market value.
Once a property is deeded to someone, the donor loses control of the asset and it cannot be reversed. Depending on the value of the estate, there could be gift or estate tax implications. As mentioned earlier, it may have capital gain tax consequences for the done when they dispose of the property.
If the person receiving the gift has creditors or judgements, the gift becomes an asset subject to those creditors or judgements.
Even though the mechanics of transferring title to a property is simple, there are many things to consider for both the person giving the property and the one receiving it. Consult an attorney and tax professional to determine the best informed decision available. There could be other alternatives that would better serve your situation.
Mortgage insurance benefits the lender if a borrower with less than a 20% down payment defaults on their loan. Most conventional mortgages greater than 80% and all FHA loans require the borrower to have this coverage.
Private mortgage insurance on conventional loans can range from 0.5% to 2.25% based on the loan-to-value and the credit worthiness of the borrower. A $350,000 mortgage would have a monthly mortgage insurance premium of $146 a month at the low-end of the scale and over $600 on the high-end.
You may request that your mortgage servicer cancel the PMI when the principal balance reaches 80% of the original value at the time the loan was made. You should have received a PMI disclosure form when you signed the mortgage documents stating the date. If you have made additional principal contributions, it will accelerate the date.
Other criteria considered to cancel the PMI on your loan is:
Conventional loans are supposed to remove the mortgage insurance when the unpaid balance is 78% of the original purchase price.
Another possibility is that the lender/servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule. For a 30-year loan, it would be after the 180th payment was paid. The borrower must be current on the payments for the termination to occur.
With the rapid appreciation that many homes have enjoyed in recent years, homeowners may be able to refinance their home and if the new mortgage amount is less than 80% of the current appraised value, no mortgage insurance would be required.
The owner would incur the cost of refinancing but eliminate the cost of the mortgage insurance. To calculate the savings, subtract the new principal and interest payment from the old principal and interest with PMI. Then, divide the savings into the cost of refinancing to determine the number of months necessary to recapture the cost.
FHA loans have two types of mortgage insurance premium: up-front and monthly. For loans with FHA case numbers assigned on or after June 3 2013 with LTV% greater than 90%, the MIP will be paid for the entire term of the loan. If that is the case, refinancing on a conventional loan is the only way to eliminate the MIP. For loans with original LTV% less than 90%, the MIP is collected for 11 years until the balance is 78% of the original amount.
When buying a home, purchasers may not have enough resources for a large down payment. It is understandable to use the best mortgage available to buy the home. The next goal should be to manage the mortgage to lower the overall costs. In this article, we explored eliminating the private mortgage insurance, but let us know if would like any further information to determine what is the best course of action for you.