USA Best Scenario for Purchasing Home With Parents

[CaliforniaKid]

Hello,
First post. I appreciate the help!

So, my scenario is as follows:
- My parents own two homes outright. One is their primary residence, one is a rental.

- My parents co-own a condo with my wife and me (mortgage is ~$300k - ownership is 50/50 between parents and me). The reason they helped us buy was to write off the mortgage interest and property taxes (we split the deduction 50/50 as well).

- My wife and I are looking to buy a new development with single family homes. We have been pre-approved on our own for $880k given a $200k down payment. $100k would need to come from parents as a gift.

What is the best tax option for all parties?
1. Receive the $100k "gift" from parents, which would result in a lower interest rate (than having them on the mortgage). This route would incur gift taxes since we would be over the $28k per person per parent. They would then help with the mortgage.

2. Include them on the mortgage, which would result in a higher interest rate because this would not be their primary residence. This would not result in any gift taxes. Since my parents do not have a primary mortgage, or HELOC, but do have $300k mortgage for my current condo (realistically, only responsible for $150k), would any of the second mortgage be deductible?

Looking for the best tax option for both my side and my parents'. Thanks for the help.

 

[kirby]

As far as gift tax goes, it is no problem unless your folks are multi-millionaires. Gift tax annual FILING EXCLUSION for filing a gift tax return for 2018 is $15K paid by one person to another. Given that --Mom can give you $15K and your wife $15K then Dad can do the same. No gift tax return needed and no gift tax. If they go over that $15K to one person in 2018 then they have to file a gift tax return but also then they use their EXEMPTION, which for 2018 is $5.6MM for Mom and same for Dad. No tax due for Mom unless she pays over $5.6 MM in gifts and same amount for Dad. Total $11.2MM in gifts by Mom and Dad and no tax due. Nice problem to have!

 

[Mary949]

As far as gift tax goes, it is no problem unless your folks are multi-millionaires. Gift tax annual FILING EXCLUSION for filing a gift tax return for 2018 is $15K paid by one person to another. Given that --Mom can give you $15K and your wife $15K then Dad can do the same. No gift tax return needed and no gift tax. If they go over that $15K to one person in 2018 then they have to file a gift tax return but also then they use their EXEMPTION, which for 2018 is $5.6MM for Mom and same for Dad. No tax due for Mom unless she pays over $5.6 MM in gifts and same amount for Dad. Total $11.2MM in gifts by Mom and Dad and no tax due. Nice problem to have!

We have a similar issue for property we purchased in 2018 in California with our child as a co-owner. As 60% owner she lives in one bedroom and we as 40% co-owners rent 2 bedrooms to tenants (people she knows through a network of friends). We put our share of the property in a living trust set up by attorney. We invested the 20% down payment via a mortgage on our primary property. My questions are:

1) Can we deduct the interest in the 20% mortgage taken on our primary property as investment expense?

2) Our child has been writing a payment to me each month instead of to the lender for the mortgage on the house we co-own. I do not want it to look like she is paying us rent, when she is buying this house as a personal residence (since one day she could possibly sell it and want the $250K tax exemption). Is this payment legal or must she pay the lender directly? If not legal, do we have to record it as income for 2018?

3) If we sell the house in 10 years, can we effectively eliminate our depreciation recapture at sale ($9K per year) if we begin to ‘give’ her $20K per year in equity now? We would write her a letter each year stating “we are giving you $20K of our interest in this property” or similar.

4) Further to #3 above, if we ‘give’ her the $20K per year, does this prevent us from deducting the mortgage interest now as planned in #1 above?

Thanks in advance for answers to any or all of these questions!

 

[kirby]

Your situation is complex and needs to be discussed with a local tax pro. As an example, you took out a loan on your primary residence and hoped to deduct the interest on that loan. But IRS rules only allow an interest deduction if the loan was used to build or improve the residence that the loan was taken out on. A tax pro is needed to see what can be done now.

 

[Mary949]

Your situation is complex and needs to be discussed with a local tax pro. As an example, you took out a loan on your primary residence and hoped to deduct the interest on that loan. But IRS rules only allow an interest deduction if the loan was used to build or improve the residence that the loan was taken out on. A tax pro is needed to see what can be done now.

 

[Mary949]

Hi, Kirby, thanks for the quick response. I guess my next stop is a local CPA. I see the interest as investment interest, since the proceeds went to the rental portion of the other property. But if it doesn't work out, it is not a huge loss to us.