I see a lot of situations where Muslim parents own their homes with adult children. This is a problem. I will go straight to the example of what I am talking about since this is the way to communicate the most beneficial information to you (I hope):
Saleem, Harita, and Samy
Saleem is a retired widower with a 23-year-old daughter, Haritha, and a 30-year-old son, Samy. Haritha married two years ago after graduating from college and lives about a three-hour drive away. Her husband is a plastic surgeon. Samy married about a year ago and had been doing pretty well in his career since he finished his education about five years ago. He started to help pay for the mortgage on Saleem’s house. Eventually, he began to pay for the whole mortgage payment. Saleem owned this home for about 20 years. He still has about $150,000 left on a halal mortgage. The house is worth $700,000.00.
Saleem sees Samy as the person who is taking care of him. He is now paying off the mortgage. Saleem can now relax about his home mortgage expenses as he is now retired and has a limited fixed income and not a large amount of savings other than the equity in his home and a 401(k) he would instead not draw on since he is not sure it is enough.
Not having a mortgage, for anyone is a massive weight lifted off a person’s shoulders. He is grateful to Samy for this. Saleem puts Samy on the deed to the home, so both of them own the house as “joint tenants with right of survivorship.” The right of survivorship means that after the death of one, the entire rest of the property will be passed on to the other joint owner. By its terms, it violates the Islamic Rules of Inheritance. So if Saleem passes away, Samy gets the whole home.
Is there a better way?
So here is the question: Did Saleem did the right thing here? Is there a better way to handle this?
Saleem should, of course, be grateful for Samy’s staying with him and paying the mortgage. However, the financial arrangement he made in rewarding Samy was excessive, and the way he did handled it (and this is common), but more importantly, it violates Islamic rules.
For one thing, there is the basic rule that Inheritance is distributed to children based on the faraid, that is the basic Islamic Rules of Inheritance. Saleem has carved out an entire asset that merely gets passed on to the son, without anything being passed on to the daughter. That is a fundamental injustice to Haritha. It does not matter that she does not need the money or that she took no part in paying for the mortgage. He has an inheritance right that needs to be vindicated.
There is also another practical problem. What happens if Samy gets sued, gets divorced, has significant medical bills or another financial calamity? Saleem would then worry that he would have to leave his home because someone had a claim against his son. He might lose everything.
Things to consider in owning a home
Here we need to balance a few things. There is no one solution to the challenge that a person like Saleem faces. A lot of it would depend on him and his goals.
If he wants to give the house to his son outright, he can do that. There is nothing wrong with that. But he should have no ownership claim to it and should not expect to have the right to live there. His son can sell it, his wife can kick him out after a fight or lose it betting on horses. Now it may, however, be possible to create an arrangement where he can continue to live in the home. I have written about this kind of planning (in a somewhat different context) previously.
Another thing we need to consider is the nature of the transaction. Samy staying with his father is not without benefits to both Samy and Saleem. If he remains in a home that has been in a mortgage for many years already, it is very likely the monthly mortgage payment is less than what he would pay to rent a comparable home. Saleem can regard the entire amount as rent. He can also decide part of it is rent and part of it is payment for the equity in the home.
That Tax Deduction
One reason for transferring ownership to Samy is that Samy may want the tax deduction for the mortgage interest. Saleem has no use for a mortgage interest deduction anymore, having a low enough income to not worry about taxes too much. Samy is in a higher tax bracket, so the tax savings would be more significant for him than for his father, who may get no benefit at all if he was not paying income taxes anyway. So Samy wants to put the mortgage in his name and thus, the home in his name as well since you cannot mortgage something you don’t own.
While we still have all the same problems as I described above, the solution may be different because there is this desire to transfer actual ownership to Samy. Here, maybe we want Samy to own the home. But one other thing we want to do is preserve the inheritance rights of Haritha.
Don’t short anyone
Sameer can accomplish Samy’s goal of getting ownership of the home. At the same time, his goal should also be not shorting Haritha on inheritance. Sameer does this by creating a note and “deed of trust” that shows there is a loan given by Sameer to Samy. There does not need to be any interest (though there may be some tax consequences). So this way, the home itself is owned by Samy, but Samer holds the equity.
Sameer would still be concerned about Samy being sued or going through some other kind of financial calamity. There are a few different solutions here as well. We can carve out interests in the house for Saleem. A solution may include making sure he has equity in the home as well as other rights. For example, Saleem does not want to to be “kicked out” by a creditor or in the event there are inlaw issues.
Don’t co-own a home with your children
My point in all of this is that the most apparent solution many Muslims engage in, in the case of Saleem and Samy, transferring part of the home to a son is a bad idea and it always worth exploring alternatives that accomplish the same goals.
Your goals should be justice. Anything that results in an injustice to a daughter, a son, a spouse or yourself is always going to be the wrong solution.