Loan to family for home purchase


H

Han

The question must have come up before, but I'd like to hear
the latest thoughts of your eminences on the subject.

Son and DIL want to buy a condo, but lack the desired
downpayment (they can come up with the required on their
own). Mom and Dad can gift some more money in 2006 before
the gift tax forms apply (12K x 2 x 2 = 48K), but want to
loan more.

What are the diverse ways to loan/gift 20K more? Is it more
beneficial to now gift the money and fill out the gift tax
form, or is it better to make it a loan, then forgive/give
back the "Mom and Dad mortgage payments" on a yearly basis?
 
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B

Bill

(e-mail address removed) (Han) posted:
The question must have come up before, but
I'd like to hear the latest thoughts of your
eminences on the subject.
Son and DIL want to buy a condo, but lack the
desired downpayment (they can come up with
the required on their own). Mom and Dad can
gift some more money in 2006 before the gift
tax forms apply (12K x 2 x 2 = 48K), but want
to loan more.
What are the diverse ways to loan/gift 20K
more? Is it more beneficial to now gift the
money and fill out the gift tax form, or is it
better to make it a loan, then forgive/give back
the "Mom and Dad mortgage payments" on a
yearly basis?
Your figure of $48K is correct. If you're determined to
avoid the gift tax form, you should prepare an arms-length
contract for any additional funds provided, with an interest
rate that is equivalent (or close to) market rates -- e.g.,
5% - 6% at least. You would not necessarily have to file a
second mortgage, but the document should have that "flavor."

You should expect your son+ to make the interest payments
periodically.

Now, if you subsequently decide to "gift" them some
additional reduction in the principal owed, that's another
question, for another tax year. Your accountant doesn't want
to hear anything about it at all, and your son shouldn't
either. <wink>

Bill
 
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S

Stuart A. Bronstein

Han said:
Son and DIL want to buy a condo, but lack the desired
downpayment (they can come up with the required on their
own). Mom and Dad can gift some more money in 2006 before
the gift tax forms apply (12K x 2 x 2 = 48K), but want to
loan more.

What are the diverse ways to loan/gift 20K more? Is it more
beneficial to now gift the money and fill out the gift tax
form, or is it better to make it a loan, then forgive/give
back the "Mom and Dad mortgage payments" on a yearly basis?
It depends on what your income tax bracket is and what your
estate tax bracket will be.

I generally like the loan and forgiveness route, though that
does involve you recognizing taxable income for interest you
never receive.

My question is, if the parents' loan is not secured by
mortgage, can both the parents and the kids find the
forgiven interest is taxable to them?

Stu
 
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B

Benjamin Yazersky CPA

Han said:
The question must have come up before, but I'd like to hear
the latest thoughts of your eminences on the subject.

Son and DIL want to buy a condo, but lack the desired
downpayment (they can come up with the required on their
own). Mom and Dad can gift some more money in 2006 before
the gift tax forms apply (12K x 2 x 2 = 48K), but want to
loan more.

What are the diverse ways to loan/gift 20K more? Is it more
beneficial to now gift the money and fill out the gift tax
form, or is it better to make it a loan, then forgive/give
back the "Mom and Dad mortgage payments" on a yearly basis?

I don't think that there's one right answer.
It depends on your facts & circumstances.
Perhaps you should consult with your CPA or estate planning
attorney to help you decide what works best for you in your
siutation
 
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R

rick++

One couple can give another couple $44,000 once a year
without triggering a gift tax.
 
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S

Seth Breidbart

Han said:
Son and DIL want to buy a condo, but lack the desired
downpayment (they can come up with the required on their
own).

What are the diverse ways to loan/gift 20K more? Is it more
beneficial to now gift the money and fill out the gift tax
form, or is it better to make it a loan, then forgive/give
back the "Mom and Dad mortgage payments" on a yearly basis?
For tax purposes, lending the money and foregiving the
entire loan next year (you don't want to let it continue,
because it generates interest income to the parents each
year it's outstanding) is probably better, though if the
parents' estates aren't large it might not matter if they
use up some of their $1 million lifetime gift exclusion.

For mortgage purposes, banks really don't like people
borrowing part of their down payment, so a gift works much
better.

Seth
 
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P

Paul Thomas, CPA

Han said:
The question must have come up before, but I'd like to hear
the latest thoughts of your eminences on the subject.

Son and DIL want to buy a condo, but lack the desired
downpayment (they can come up with the required on their
own). Mom and Dad can gift some more money in 2006 before
the gift tax forms apply (12K x 2 x 2 = 48K), but want to
loan more.

What are the diverse ways to loan/gift 20K more? Is it more
beneficial to now gift the money and fill out the gift tax
form, or is it better to make it a loan, then forgive/give
back the "Mom and Dad mortgage payments" on a yearly basis?
At least two things come to mind. The debt they owe needs
to be disclosed on their loan applications. And the IRS may
consider the fact that they didn't make one single payment
on the "debt" and call the whole thing a "gift" and wonder
why you didn't file the gift tax return.

It might be best to gift them what they need and file a gift
tax return and get it past you.
 
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J

joetaxpayer

rick++ said:
One couple can give another couple $44,000 once a year
without triggering a gift tax.

From my "2006 tax update" posted 10/23/05

The gift tax exclusion goes up to $12,000 from $11,000 (new)

So a couple can give another couple $48000 now with no gift
tax. I'll let you know where to send the money, Mrs.
Taxpayer has an itch to redecorate. :)

JOE
 
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H

Han

At least two things come to mind. The debt they owe needs
to be disclosed on their loan applications. And the IRS may
consider the fact that they didn't make one single payment
on the "debt" and call the whole thing a "gift" and wonder
why you didn't file the gift tax return.

It might be best to gift them what they need and file a gift
tax return and get it past you.
Thanks for all your advice, everyone. Thus far I have gone
the route of the 48K gift. Anything more I will have to
cogitate on. Possibly filing a gift tax return is the thing
to do. Will have to find out whether New Jersey has any
special rules ...
 
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H

Han

At least two things come to mind. The debt they owe needs
to be disclosed on their loan applications. And the IRS may
consider the fact that they didn't make one single payment
on the "debt" and call the whole thing a "gift" and wonder
why you didn't file the gift tax return.

It might be best to gift them what they need and file a gift
tax return and get it past you.
Thanks for all your advice, everyone. Thus far I have gone
the route of the 48K gift. Anything more I will have to
cogitate on. Possibly filing a gift tax return is the thing
to do. Will have to find out whether New Jersey has any
special rules ...
 
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E

ed

It would seem that a gift of $48,000 ( make it someinthing
less because of Christmas gifts, etc and be sure you and
spouse write seperate checks so you don't have to file a
gift tax return) would suffice for the Mortgage Co not to
complain that you are also providing a 2nd mortgage of only
about $12,000? I have done this several times: Write up a
2nd mortgage for AT LEAST the interest rate and payoff terms
of the 1st, secured by the property, and FILE it with your
County? clerk. They should actually pay AT LEAST the
interest and you report it as income and they deduct it on
Schedule A. If you don't like charging relatives interest,
gift it back to them at the end of the year.

Next year, you can forgive the 2nd mortgage as a gift.

This avoids fileing a gift tax return, satisifies the 1st
mortgagee, gives your kids the down payment, complies with
all tax matters, etc.

ed
 
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