Family Home Transfers: Avoiding Pitfalls in Generational Property Handovers

Dear Monty: My daughter's future in-laws are long-term homeowners in one of the top California markets. They have sizable equity in their home but still have a mortgage. They have offered to their son to take over the mortgage payments. Neither they nor my daughter are sophisticated about such things (though I am a long-time real estate broker). I told my daughter that the in-laws are entitled to the equity in the house, but if they simply move in and make the mortgage payment without any sharing of future equity, that would be just paying rent. Hope you can advise on an equitable arrangement.

Monty's Answer: There are many important considerations in such an arrangement. The goal should include clear communication and fair arrangements. Timing may be an important consideration based off the fact that the marriage is sometime in the future. While your daughter's future in-laws are very generous in making such an offer, your daughter and future husband should consider whether this is the best path for them. I cannot advise on an equitable arrangement as it is beyond the scope of Dear Monty. I can, however, share the list below of what is involved and implore you to find a specialized attorney to give the advice.

No. 1: Mortgage assumption: Most mortgages are only assumable with the lender's approval. Depending on the lender, the daughter and son-in-law may need to qualify for the mortgage on their own.

No. 2: Due-on-sale clause: Many mortgages have a due-on-sale clause that requires full repayment if the property is transferred to someone else. Moving in and taking over payments could trigger this clause.

No. 3: Legal ownership: Without a formal transfer of ownership, the original owners remain legally responsible for the mortgage, even if they don't make the payments.

No. 4: Credit implications: Late payments or defaults would affect the credit of the person(s) on the mortgage, not necessarily those making the payments.

No. 5: Insurance: The homeowners insurance may need to be updated to reflect all occupants.

No. 6: Tax considerations: The mortgage interest deduction would still belong to the legal owner, not those making payments. There could also be other tax implications.

No. 7: Future equity: Without a formal agreement, there's no legal basis for the daughter and son-in-law to claim future equity in the home.

No. 8: Rental agreement: Consider creating a formal or rent-to-own agreement to protect all parties' interests.

No. 9: Estate planning: This arrangement could impact future inheritance plans or complicate estate matters.

No. 10: Alternative option: Refinancing the mortgage with all parties as co-borrowers or selling the home to the daughter and son-in-law might be cleaner solutions.

Additionally, because the home is in California, there are a variety of special conditions that should be considered prior to them moving in. For example, Proposition 13, rent control and community property laws can cause unwanted surprises.

Given these California-specific considerations, it becomes even more crucial to consult with a California-based estate planning attorney who is also proficient with real estate law for guidance on how state laws might impact this arrangement. They can help structure the agreement to protect all parties' interests while complying with California's unique real estate regulations.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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