Mortgage from parents


T

tweety

I am looking to purchase a new home for $550K. I have 20%
downpayment. My parents have suggested to buy the house
Cash so that I don't have to pay almost the same amount of
interest over 30yr.

The options I am thinking about is:

1. Get a mortgage from them of the amount I need and pay them
interest. This way I still get tax deduction and the interest goes to
a family member vs. a bank. I believe they will have to declare as
income and pay taxes on it but at least it will be at a lower tax
bracket then mine.

2. take gift of the total amount and pay the developer.

Can you help me figure out how to do the first option, what
is involved and how do I let the IRS know that I am doing
this. And what is the tax implications on both options.

Thanx in advance for your help.
 
S

Stuart O. Bronstein

I am looking to purchase a new home for $550K. I have 20%
downpayment. My parents have suggested to buy the house
Cash so that I don't have to pay almost the same amount of
interest over 30yr.

The options I am thinking about is:

1. Get a mortgage from them of the amount I need and pay them
interest. This way I still get tax deduction and the interest
goes to a family member vs. a bank. I believe they will have to
declare as income and pay taxes on it but at least it will be at
a lower tax bracket then mine.
Right. Make sure the loan is secured by a written note and
mortgage. They may also be able to give you a lower
interest rate than a bank would, but that's between you and
your parents.
2. take gift of the total amount and pay the developer.
Which would result in your parents having to incur (but not
necessarily pay) a gift tax and file a return.
Can you help me figure out how to do the first option, what
is involved and how do I let the IRS know that I am doing
this. And what is the tax implications on both options.
Pretend your parents are the bank, and get a loan from them
as if you were getting it from a bank. You don't need to
tell the IRS anything. I don't know if your parents need to
report to the IRS about the amount of interest they receive
from you every year.

Stu
 
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H

Harlan Lunsford

tweety said:
I am looking to purchase a new home for $550K. I have 20%
downpayment. My parents have suggested to buy the house
Cash so that I don't have to pay almost the same amount of
interest over 30yr.

The options I am thinking about is:

1. Get a mortgage from them of the amount I need and pay them
interest. This way I still get tax deduction and the interest goes to
a family member vs. a bank. I believe they will have to declare as
income and pay taxes on it but at least it will be at a lower tax
bracket then mine.

2. take gift of the total amount and pay the developer.

Can you help me figure out how to do the first option, what
is involved and how do I let the IRS know that I am doing
this. And what is the tax implications on both options.
One way this is done, when the parents have all the cash
needed and can afford to give the equivalent for a home
purchase, is for (you) the mortgagor to borrow the amount
from parents. they file a lien, financing statement,
whatever,at the courthouse so IRS is satisfied it is true
mortgage interest. Also set up a formal mortgage with all
the usual requirements - interest, payment schedule, etc.

Then, if the parents want to, they can give you a total of
22,000$ per year by forgiving that much of the principal.
If you are married, and both your and spouse's name are on
the deed and mortage, they can forgive up to 44,000 per
year.

See some local tax pro help with the details.

Cheer$,
Harlan Lunsford, EA in LA
 
A

Arthur Kamlet

I am looking to purchase a new home for $550K. I have 20%
Pretend your parents are the bank, and get a loan from them
as if you were getting it from a bank. You don't need to
tell the IRS anything. I don't know if your parents need to
report to the IRS about the amount of interest they receive
from you every year.
Yes, see the fine print on Form 1040 Schedule B, Interest.

They will have to report receiving the interest from you.

If you itemize your deductions, you would report paying the
interest to them on Schedule A.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
C

CBotella

I don't know if your parents need to
report to the IRS about the amount of interest they receive
from you every year.
They sure do have to report it, on Schedule B!
 
R

Red Scholefield

I have and presently hold private mortgages, some are for my
kids homes. Have a lawyer draw up the standard mortgage
documents and file them. Kids can deduct interest, I
declare interest as income. I can undercut the financial
institution by a point or so and I get a point or so higher
interest than the institutions are paying. Kids win, I win.

Unlike financial institutions who inform the IRS, kids must
inform IRS of who holds the mortgage when they file for
mortgage deduction. This may have changed so consult your
tax person on this item.

Other dispersal of funds to help kids or grandkids is a
separate issue. Get a tax professionals help here.

Red S.
 
S

Stuart O. Bronstein

Harlan Lunsford said:
One way this is done, when the parents have all the cash
needed and can afford to give the equivalent for a home
purchase, is for (you) the mortgagor to borrow the amount
from parents. they file a lien, financing statement,
whatever,at the courthouse so IRS is satisfied it is true
mortgage interest. Also set up a formal mortgage with all
the usual requirements - interest, payment schedule, etc.

Then, if the parents want to, they can give you a total of
22,000$ per year by forgiving that much of the principal.
If you are married, and both your and spouse's name are on
the deed and mortage, they can forgive up to 44,000 per
year.
To reiterate what you are saying, make sure that any gift is
of principal and not of current payments due under the note.
Otherwise either your parents will have taxable income but
will not have received money to pay the tax.

Stu
 
T

tweety

Harlan Lunsford said:
tweety wrote:
One way this is done, when the parents have all the cash
needed and can afford to give the equivalent for a home
purchase, is for (you) the mortgagor to borrow the amount
from parents. they file a lien, financing statement,
whatever,at the courthouse so IRS is satisfied it is true
mortgage interest. Also set up a formal mortgage with all
the usual requirements - interest, payment schedule, etc.
What do I need to do this? Do I need a lawyer or CPA or both?
Then, if the parents want to, they can give you a total of
22,000$ per year by forgiving that much of the principal.
If you are married, and both your and spouse's name are on
the deed and mortage, they can forgive up to 44,000 per
year.
I don't understand this one. What do you mean they can
forgive $22K of the principal. Is this like gifting to me?
Is this for every year? If so, this is great because for
the first few years where most of payments are interest, I
can actally pay off pricipal ( without really paying). Am I
correct?
 
H

Harlan Lunsford

Stuart said:
(e-mail address removed) (tweety) wrote:
(snip snip snip)>
Pretend your parents are the bank, and get a loan from them
as if you were getting it from a bank. You don't need to
tell the IRS anything. I don't know if your parents need to
report to the IRS about the amount of interest they receive
from you every year.
Not required unless parents are in the business of making
mortgage loans. And they're usually not.

One client here dutifully prepares a 1099-int every year for
his two mortgagors. Well, he used to untill I finally
convinced him it wasn't needed. One of these was his
daughter, other non related, but he had financed the
properties as a convenience and is not in the business of
lending money.

Cheer$,
Harlan Lunsford, EA in LA
 
A

Arthur L. Rubin

Not required unless parents are in the business of making
mortgage loans. And they're usually not.
Agreed that the children don't need to a file a 1099-INT nor
the parents a 1098. But the parents must report the
interest on their 1040 Schedule B. If the children deduct
the intrest, they must report the parents ID on Schedule A.
 
T

tweety

I am looking to purchase a new home for $550K. I have 20%
downpayment. My parents have suggested to buy the house
Cash so that I don't have to pay almost the same amount of
interest over 30yr.

The options I am thinking about is:

1. Get a mortgage from them of the amount I need and pay them
interest. This way I still get tax deduction and the interest goes to
a family member vs. a bank. I believe they will have to declare as
income and pay taxes on it but at least it will be at a lower tax
bracket then mine.

2. take gift of the total amount and pay the developer.

Can you help me figure out how to do the first option, what
is involved and how do I let the IRS know that I am doing
this. And what is the tax implications on both options.

Thanx in advance for your help.

Thank you all for replying.

couple more question: What harm ( if any ) am I doing to
my parents? One will be 65 next year, so what happens with
Medicaid,Medicare, Social Security etc.

Also, what happens if he get sick, Can the hospital come
after my house as he is holding the mortgage?
 
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R

Red Scholefield

I just show the interest from kid's mortgages, improvement loans and car
loans on my 1044 as interest income. I've had no problems.

If your kids take the tax deduction for home mortgage and it is truly a
formal mortgage with documents supporting it, then wouldn't one be amiss in
not reporting the interest income?

Red S.
 
S

Seth Breidbart

Not required unless parents are in the business of making
mortgage loans. And they're usually not.
Isn't the interest still taxable income? That has to be
reported, whether or not on the same form a bank would use.

Seth
 
R

ranchman

Harlan Lunsford said:
tweety wrote:
One way this is done, when the parents have all the cash
needed and can afford to give the equivalent for a home
purchase, is for (you) the mortgagor to borrow the amount
from parents. they file a lien, financing statement,
whatever,at the courthouse so IRS is satisfied it is true
mortgage interest. Also set up a formal mortgage with all
the usual requirements - interest, payment schedule, etc.

Then, if the parents want to, they can give you a total of
22,000$ per year by forgiving that much of the principal.
If you are married, and both your and spouse's name are on
the deed and mortage, they can forgive up to 44,000 per
year.

See some local tax pro help with the details.
I'm confused. I thought that the annual gift tax exclusion
per person was $11,000. Am I wrong?

Larry Wingo
 
D

Dave Woods, EA

ranchman said:
I'm confused. I thought that the annual gift tax exclusion
per person was $11,000. Am I wrong?
Two spouses splitting gifts to two spouses equals $44,000.

--
David M. Woods, EA
Boston, MA 02109

Postings here are general information only and not to be
relied upon as advice.
 
H

Harlan Lunsford

I'm confused. I thought that the annual gift tax exclusion
per person was $11,000. Am I wrong?
Let me clarify further , then. Right, 11000$ per person.
So, if parents (husband and wife) make a gift, he, or she,
can give 22000$, 11 from each to: the child, and if child
is married, each parent may give 11k to that spouse. total
44000$. Nifty, eh?

Cheer$,
Harlan Lunsford, EA in LA
 
D

Don Rosenberg

Then, if the parents want to, they can give you a total of
I'm confused. I thought that the annual gift tax exclusion
per person was $11,000. Am I wrong?
I can give my son $11,000 and my wife can give my son
$11,000, and I can give my son's wife $11,000, and my wife
can give my son's wife $11,000. Thus, $44,000.
 
R

Red Scholefield

Yes, sorry for the typo - CRS strikes again.... Yes Schedule
B was attached.

I am lucky to have kids I am comfortable with financing.

It is really sad to see Sr. Citizens getting bled by the
banks on their 1.5% CDs (which they will probably never need
the principle) while their kids are getting bled by the same
institution for 5 1/2% or more. Has anyone noticed the
disparity between lending rates and interest rates that has
come into play as the interest rates crashed?

Red S.
 
T

tweety

Does the loan have to be a publicly registered inorder for
me to deduct tax?

I have a realestate attorney who will be drawing up the
papers as part of the house closing(I hired him to do the
closing etc.) but he will do the mort as well if we decide
to go ahead. Is that all i need?

Can someone recommend a good CPA, who can answer these
questions for me and my parents in NJ?
 
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L

L K Williams

tweety said:
Does the loan have to be a publicly registered inorder for
me to deduct tax?

I have a realestate attorney who will be drawing up the
papers as part of the house closing(I hired him to do the
closing etc.) but he will do the mort as well if we decide
to go ahead. Is that all i need?

Can someone recommend a good CPA, who can answer these
questions for me and my parents in NJ?
To be able to deduct the interest on the mortgage, the
lender, your parents, must have a "valid lien under local
law." In most, if not all states, that requires a recorded
mortgage. If this condition is not met, the loan is not
considered to be a qualified home loan and the interest will
be personal and not deductible.

This does not relieve the parents from having to report the
interest as income and paying any resulting tax.
 

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