Buying the home I am renting from a family member.

[jdhansen]

So a peculiar situation that I didn't expect to get into has arisen.  About 6 months ago after selling our home and moving for work, my DW and I found ourselves renting a home from my grandfather.

It was our intention for this to be short term as we were going to buy a new home in the area with the proceeds of our home sale.  Renting was just supposed to be temporary until that was completed.
However DW has fallen in love with the home and the area and doesn't want to move and is perfectly happy to continue renting as am I.

Where it gets tricky is when we went to reup our lease with Grandpa, while he agreed to the renewal, he said he would rather just sell it to us than play landlord.

DW thinks this is a great idea and I don't disagree, but as I've never bought from family before I am concerned there might be something we aren't aware of that could get us into trouble.

Here are the details he laid out to us and data I have gathered as I didn't want him just giving it to us, which he tried to do at first before we talked him into renting it to us.

House in California and a realtor pulled comps saying 325 to 350k was a fair price.  Grandpa wants 285k.  Won't take a dime more but was willing to let us cover all other costs of the transaction. We agreed in no contingencies as I have helped him work on this house my whole life and I know the issues and those I didn't he is always quick to point out and offer to fix.

Is there anything we need to be aware of that might cause issues with this transaction.  Already preapproved for a mortgage that we will be putting 20% down on out of our cash and all other family members have agreed its a great idea.  What are we missing?

[theoverlook]

I don't think you're missing anything. Get a title insurance / closing company to handle the paperwork, and they'll take care of making sure every t is crossed and every i is dotted. And congrats on the nice family dynamic, I hope it works out great for you guys.

[Dicey]

Oh, yes you are: the Tax Assessor.  If you buy a home for under market value,  they're gonna be out there in a flash. You want to be fully prepared when this happens, with a complete list of the problems that the house needs to have corrected. If there are other potential inheritors you might want to run the proposed deal past an experienced Estate Attorney. They can probably help you with a script for the Tax Assessor, too. Oh and if you make permitted improvements, they will reassess the property and raise your taxes, so it generally pays to fight to keep them as low as  possible.

[PMJL34]

I think you might be incorrect Dicey.

With intra family sales in CA, I believe grandparent can pass the house to the grandchild (via step up basis) without any increase in year property tax and don't have to worry about buying below market value.

I could be wrong.

Either way, you are golden OP. Thank your grandpa and your supportive family members and make sure to treat all of them very generously.   

[AMandM]

IANAL, but I have heard that the difference between FMV and the price you pay gets counted as a gift on which you have to pay tax (federal income tax? not sure). Like I said, it's hearsay, but I would check into it.

On the family dynamics side, I can think of one way in which problems might arise down the road. If there are other grandchildren, is there any chance that this generous act of your grandpa's to you will be held against you in the future on behalf of the other grandchildren?  "Since you got such a sweetheart deal from Grandpa, it's only fair that you should pay part of your cousin Susie's downpayment on her house..."? Your family sounds more healthy than that, but it might also be something worth checking.

Congrats!

[Dicey]

I think you might be incorrect Dicey.

With intra family sales in CA, I believe grandparent can pass the house to the grandchild (via step up basis) without any increase in year property tax and don't have to worry about buying below market value.

I could be wrong.

Either way, you are golden OP. Thank your grandpa and your supportive family members and make sure to treat all of them very generously.

For OP's sake, I'd happily be wrong. It's still something that must be researched in advance and therefore not overlooked. The question was, "What are we missing?". Just tryin' to help.

[jdhansen]

Oh, yes you are: the Tax Assessor.  If you buy a home for under market value,  they're gonna be out there in a flash. You want to be fully prepared when this happens, with a complete list of the problems that the house needs to have corrected. If there are other potential inheritors you might want to run the proposed deal past an experienced Estate Attorney. They can probably help you with a script for the Tax Assessor, too. Oh and if you make permitted improvements, they will reassess the property and raise your taxes, so it generally pays to fight to keep them as low as  possible.

Would this be any different than if we were buying from a stranger? Or do you mean they would hit us with some kind of specialty assement because we got a good deal?  The mortgage company said we had to get an appraisal and I was just figuring that is what the tax man would use to tax us.

Thank you for the suggestion on an estate attorney.  We will add that to the list of items to look into.

[sailinlight]

Oh, yes you are: the Tax Assessor.  If you buy a home for under market value,  they're gonna be out there in a flash. You want to be fully prepared when this happens, with a complete list of the problems that the house needs to have corrected. If there are other potential inheritors you might want to run the proposed deal past an experienced Estate Attorney. They can probably help you with a script for the Tax Assessor, too. Oh and if you make permitted improvements, they will reassess the property and raise your taxes, so it generally pays to fight to keep them as low as  possible.

Would this be any different than if we were buying from a stranger? Or do you mean they would hit us with some kind of specialty assement because we got a good deal?  The mortgage company said we had to get an appraisal and I was just figuring that is what the tax man would use to tax us.

Thank you for the suggestion on an estate attorney.  We will add that to the list of items to look into.

In California the purchase price is used as the tax basis. Buying from a parent allows you to inherit their (probably very very low) tax rate. Not sure about grandparents.

[jdhansen]

IANAL, but I have heard that the difference between FMV and the price you pay gets counted as a gift on which you have to pay tax (federal income tax? not sure). Like I said, it's hearsay, but I would check into it.

On the family dynamics side, I can think of one way in which problems might arise down the road. If there are other grandchildren, is there any chance that this generous act of your grandpa's to you will be held against you in the future on behalf of the other grandchildren?  "Since you got such a sweetheart deal from Grandpa, it's only fair that you should pay part of your cousin Susie's downpayment on her house..."? Your family sounds more healthy than that, but it might also be something worth checking.

Congrats!

I will look into the possibility of the difference being considered a gift.  Sounds like @Dicey suggestion of an estate attorney makes even better sense.  Also maybe a tax professional as we are trying to avoid him taking any unnecessary hits.

We are blessed on the family side.  Its just me and my 3 siblings who all think its a good idea.  In fact my 2 sisters were teasing Grandpa about not giving it to us for free, which has made getting him to take anything that much harder.

[jdhansen]

Oh, yes you are: the Tax Assessor.  If you buy a home for under market value,  they're gonna be out there in a flash. You want to be fully prepared when this happens, with a complete list of the problems that the house needs to have corrected. If there are other potential inheritors you might want to run the proposed deal past an experienced Estate Attorney. They can probably help you with a script for the Tax Assessor, too. Oh and if you make permitted improvements, they will reassess the property and raise your taxes, so it generally pays to fight to keep them as low as  possible.

Would this be any different than if we were buying from a stranger? Or do you mean they would hit us with some kind of specialty assement because we got a good deal?  The mortgage company said we had to get an appraisal and I was just figuring that is what the tax man would use to tax us.

Thank you for the suggestion on an estate attorney.  We will add that to the list of items to look into.

In California the purchase price is used as the tax basis. Buying from a parent allows you to inherit their (probably very very low) tax rate. Not sure about grandparents.

That makes sense and it can't hurt to look into it.  Thank you for the excellent suggestion.

[Dicey]

Oh, yes you are: the Tax Assessor.  If you buy a home for under market value,  they're gonna be out there in a flash. You want to be fully prepared when this happens, with a complete list of the problems that the house needs to have corrected. If there are other potential inheritors you might want to run the proposed deal past an experienced Estate Attorney. They can probably help you with a script for the Tax Assessor, too. Oh and if you make permitted improvements, they will reassess the property and raise your taxes, so it generally pays to fight to keep them as low as  possible.

Would this be any different than if we were buying from a stranger? Or do you mean they would hit us with some kind of specialty assement because we got a good deal?  The mortgage company said we had to get an appraisal and I was just figuring that is what the tax man would use to tax us.

Thank you for the suggestion on an estate attorney.  We will add that to the list of items to look into.

We bought our last flip project below market because it was a POS with foundation problems. Fortunately, DH saw the assessor pull up a few days after closing. He invited her in, showed her everything that was wrong with the property and pissed and moaned about how much we had still overpaid until she said she had to go, lol.

Anecdotally, I know of a few other people this has happened to. Due to Prop. 13, their hands are so tied that they squeeze anywhere they can.

[Villanelle]

I bought my grandmother's house in CA and yes, I was able to keep her tax basis.  However, it may be that it technically passed to my dad and then I bought it from my dad.  I can't recall, exactly. 

We paid FMV minus the fees we likely would have paid a lawyer.  We did hire someone to help with the transaction.  The person was an re agent and also a loan broker, I think.  (We didn't have a loan.  It was actually financed from my parents, but we did an official lien and everything else.)  We wanted to make sure the paperwork was solid, so we paid them a flat fee to do everything they would do for a regular sale.  (It's been a long time, so I'm fuzzy on the details.  But I think we paid $1000 and that covered everything--the lien, then transfer of ownership, the title insurance paperwork, etc. 

Also, the prop 13 "inherited" basis is different from the tax implications of selling for less than FMV and that being seen as a gift by Uncle Sam.  Ours was close enough to FMV and we could justify the price if asked, so we didn't worry about it.  But if we had paid significantly less then FMV, we'd have treated it like a large gift and filed the necessary paperwork (so dad would have paid a gift tax, but actually not because he'd have just filed the paperwork to kick that can down the road, basically.)