Partnership agreement requires documentation

Real estate transaction

Get an attorney involved from the very beginning to make sure you properly document and paper your transaction. (bulentgultek, Getty Images / July 20, 2014)

Q: I have a condo and have paid about 50 percent of the mortgage. My sister has offered to pay off my mortgage, but if she does, I want to put her on the title as co-owner.

We have discussed different scenarios (for example, what happens if I get married, when I die, etc). Neither of us has children, so once we pass away all our assets will go to our nieces and nephews.

Do we need to get a lawyer involved? Can we just go to a title (escrow) company and add her name? Will this be viewed as a gift? So that she would have to pay a gift tax?

A: Yes, you should get an attorney involved from the very beginning to make sure you properly document and paper your transaction. And although it is clear your sister is a good person, I always recommend people in your situation enter into a partnership agreement now, before the title is transferred and while you are still talking to each other.

That agreement should answer all of your questions, such as what happens if one of you dies or if one of you wants out of the deal. Additionally, who will pay the expenses of the condo — insurance, real estate taxes, condo fees?

The attorney will also arrange to record the deed in the recording office in your jurisdiction.

Will this be considered a gift? I don't think so. I would structure it in such a way that she is buying half of your property by paying off the mortgage. Accordingly, your sister will not have any tax issues, but you may. Since this will be considered a sale, you will have to pay capital gains tax unless you meet the "ownership and use" test. If, within two years before the sale, you have owned and used the property as your main residence, you can exclude up to $250,000 of any profit you will make on the sale.

Hopefully, your attorney or a financial adviser can look at the numbers and walk you through the process. I suspect, from the little information I have, that you will probably not have to pay any federal tax.

Q: My dad is in a nursing home and has been there four years. We want to sell his house so we can use the sales proceeds for his benefit. The property has appreciated greatly, and we are concerned that he will not be able to meet the IRS "ownership and use" test. Is there any way we can take advantage of the up-to-$250,000 exclusion of gain?

A: I assume your father is mentally competent. You first have to determine what profit he will have made, taking into consideration that he received the "stepped up" basis when your mother died.

The ownership and use test allows home sellers to exclude up to $250,000 of their house profit (or up to $500,000 if they file a joint tax return), if you have owned and used your home for two out of the five years before it is sold.

According to the IRS, there is an exception to the use test, if (1) you become physically or mentally unable to care for yourself, and (2) you owned and lived in your main home for at least one year during the five-year period before it is sold. You still have to meet the two-out-of-five-year ownership test to claim the exclusion. For more information, see "Selling Your Home," IRS Publication 523, free online from irs.gov/publications.

Benny L. Kass is a practicing attorney in Washington and Maryland. No legal relationship is created by this column; mailbag@kmklawyers.com.

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