Mortgage from parents


T

tweety

I am new to lot of this financial/tax stuff.

I am looking to purchase a home and which, my dad will be
living with me. He has enough cash to lend me as mortgage.
In stead of paying the banks ~6.0% interest, maybe I can pay
my dad say ~5.5% and give him the benefit. This way he will
have dependable return on his money and I will get my
mortgage deducations.

The questions I have is:

1. Is this doable? If so, what do i need to make sure of.
Especially, if he passes away or something terrible happens
to him and he can't make decisions on his own?

2. what would having a steady income do to his medicare
eligiblity?

3. Would this count as part of his estate and then he will
end up paying taxes on it?

I really don't even know what other things I should be
looking at. Can you please help?
 
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P

Phil Marti

I am looking to purchase a home and which, my dad will be
living with me. He has enough cash to lend me as mortgage.
In stead of paying the banks ~6.0% interest, maybe I can pay
my dad say ~5.5% and give him the benefit. This way he will
have dependable return on his money and I will get my
mortgage deducations.

The questions I have is:

1. Is this doable? If so, what do i need to make sure of.
Certainly. All that's necessary is a mortgage, secured by
the residence, guaranteeing repayment of the loan. You
should hire an attorney to set things up and see that
everything's properly recorded.
Especially, if he passes away or something terrible happens
to him and he can't make decisions on his own?
Totally separate issue. If your father doesn't have these
issues already set out in a will, living will, durable power
of attorney, etc., he needs to see an estate planning lawyer
yesterday. (So do you, for your own affairs.)
2. what would having a steady income do to his medicare
eligiblity?
Nothing, but I assume that you're talking about Medicaid,
not Medicare.

Medicaid is a Federal/state welfare program that pays
medical bills, including long-term care bills, for people
who can't pay their own. Beneficiaries must use their own
income and assets, within limits, before Medicaid kicks in.
If you're interested in finding ways to shift more of the
bill to the taxpayers, there are elder law lawyers who
specialize in that.
3. Would this count as part of his estate and then he will
end up paying taxes on it?
Yes and "who knows?" See "estate planning" above.

Phil Marti
Topeka, KS
 
S

Stuart O. Bronstein

I am looking to purchase a home and which, my dad will be
living with me. He has enough cash to lend me as mortgage.
In stead of paying the banks ~6.0% interest, maybe I can pay
my dad say ~5.5% and give him the benefit. This way he will
have dependable return on his money and I will get my
mortgage deducations.

The questions I have is:

1. Is this doable? If so, what do i need to make sure of.
Especially, if he passes away or something terrible happens
to him and he can't make decisions on his own?
So he plans to lend you enough money to pay for the house in
cash, and you will owe him the money back? Yes, it's
doable. The things I can think of that you need to be sure
of (this is not an exhaustive list - others may come along
with more things) are:

1. Make sure you are paying sufficiently high interest based
on minimum interest rates issued by the IRS each month.
If you don't, you may be receiving a taxable gift to the
extent your payments are too low.

2. Be sure that the loan is secured by a mortgage or deed of
trust. I believe the interest payments will not be
deductible otherwise.

3. Have the documents (note and mortgage) prepared by a
qualified attorney, or by a title company if they are
used in your state.
2. what would having a steady income do to his medicare
eligiblity?
Don't know.
3. Would this count as part of his estate and then he will
end up paying taxes on it?
The note will be part of his estate, yes. If the interest
rate is on the low side when he dies, the value of the note
will be lower than its face value, so you might actually
save some estate taxes this way.

If your father's estate is large enough to worry about
estate taxes and you are interested is reducing his tax
liability, consider having him forgive part of the remaining
principal of the note each year. There is a maximum amount
that this can be done with (currently $11,000 per donor per
donee, which means up to $44,000 if both you and he are
married) without incurring gift tax. But the gift will
reduce his taxable estate.

If you do that, however, your interest deductions will be a
bit lower than they would have been, because your mortgage
payments will consist of more principal and less interest as
the amount due goes down.
I really don't even know what other things I should be
looking at. Can you please help?
That's pretty much all I can think of. This kind of thing
is fairly common, and completely legitimate. Just make sure
it's fully documented and done with commercially reasonable
terms.

Stu
 
D

Drewremedy

I am looking to purchase a home and which, my dad will be
living with me. He has enough cash to lend me as mortgage.
In stead of paying the banks ~6.0% interest, maybe I can pay
my dad say ~5.5% and give him the benefit. This way he will
have dependable return on his money and I will get my
mortgage deducations.

The questions I have is:

1. Is this doable?
This is certainly doable. From Dad's standpoint he shoud
have a carefully drafted and RECORDED first mortgage on the
property which protect him in case you stumble for one
reason or another!
2. what would having a steady income do to his medicare
eligiblity?
The small income component (the interest) most likely has
no bearing on his medicare. His overall assets may come
into play if medicaid becomes an issue. Disposing or
otherwise making assets noncountable so as to intentionally
impoverish oneself for medicaid is a whole different can of
legal and ethical worms
3. Would this count as part of his estate and then he will
end up paying taxes on it?
Assets all count as part of his estate--but at least for
now, the first $1.5 million would pass free of any Federal
estate taxes. Unless Dad is in that range---no Federal
issue.

The big problem is the socal one--you get into some
situation where making the payment isn't #1 on your list and
Dad has a problem to forclose. Worse, you no longer can
live together, perhaps because of his health or your job
moves or you have a new life partner who is not keen on the
arrangement. The tiny bit of intrafamily benefit now
becomes a big drag. Unless you are each very comfortable
and well docuemented/protected then it might make sense for
you to pay a tad higher market mortgage and Dad to buy a
safe CD or whatever at a tad lower rate and you both retain
your economic freedom?
 
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B

Bill

Tweety posted:
I am new to lot of this financial/tax stuff.
I am looking to purchase a home and which,
my dad will be living with me. He has enough
cash to lend me as mortgage. In stead of
paying the banks ~6.0% interest, maybe I can
pay my dad say ~5.5% and give him the
benefit. This way he will have dependable
return on his money and I will get my
mortgage deducations.

The questions I have is:
1. Is this doable? If so, what do i need to make
sure of. Especially, if he passes away or
something terrible happens to him and he
can't make decisions on his own?
Yes, it is "doable." You've noted one issue, which involves
a "Durable power of attorney" -- both for health matters and
financial affairs.

Such forms are available at various sites on the internet,
but in view of the total situation, I would recommend you
consult a local attorney to handle *both* matters -- i.e.,
the mortgage agreement, and the powers of attorney.
2. what would having a steady income do to
his medicare eligiblity?
It would have no effect. One of the things that is
necessary, is that this be a legal contract ... so as far as
his personal financial affairs are concerned, it's no
different than if he deposted his money in a CD, or annuity
with monthly checks.
3. Would this count as part of his estate and
then he will end up paying taxes on it?
Yes, the mortgage would be an asset, but since federal
estate taxes don't kick in until over a million dollars are
involved, that shouldn't be an issue. In any event, that's
an issue the attorney can advise you about, since it
involves your father's *total* financial worth.
I really don't even know what other things I
should be looking at. Can you please help?
All issues should be laid out by any competent attorney, if
you present your situation. Since this is a "Tax" group,
the key issue is that your father *will have to report the
interest payments you make to him* on his federal tax forms.

And, you will be able to deduct the *interest* portion of
the mortgage payments. One of the things the attorney
should do, is provide you with a statement of the interest
and principal breakdown for each payment --it's called an
amortization schedule.

I hope this gets you (and your father) started down the
right road.

Bill
 

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