Sub2 Title Issue
parents of a good friend of mine want to give their 2nd home to their children (to get them started in REI) property in CA, has substantial equity with only 200k loan balance. I have the following questions for the experts here:
1) can the children hold title, get tax write off without applying for a new loan??
2) if property is acquired sub2, deed is given to the children, will title still be under parent's name??
3) how can children get title and
benefits of t tax write off without applying for a new loan since they (children) may not qualify due to income, FMV of home is about 700k+
4) can this property just be gifted without triggering a new loan?? will this be as simple as amending the deed and adding the children, or just take over an existing loan/mortgage provided credit is good for all children???
5) property is in a fairly good area, appreciating, does it pay to gut down the house (house is old) and build a new one with the int. rate for construction loan still reasonable. property is zoned R-1
thanks in advance.
In a Sub2 transaction, the title/deed (for our purposes the same thing) is transferred by using a grant deed, or Warranty Deed, and although not entirely correct, sometimes a Quit Claim Deed is used. When recorded, this document will transfer title to the new owners. Then start making the payments on the existing loan.
The existing financing most likely has a Due On Sale Clause. The transfer of title would allow the lender (at their option) to call the loan due. This is not likely as the lenders are hesitant to do this on loans that are paid on time.
If the children are making the payments, they are entitled to write off the interest portion of the payments on their tax returns.
If they try to assume the loan, the lender will require them to qualify for the loan, just like they were applying for a new one.
The decision to gut the house or not depends upon the goals of the people involved, and their expected return. There is considerably more information required to make an educated decision about this than you've provided here.
Jeff[ Edited by jeff12002 on Date 05/13/2004 ]
thanks jeff, qualifying for the loan, will this be on the remaining 200k loan balance or will it be on the fmv of the existing home?
to get the write off on the interest, do the children have to be on title via a quit claim deed? or for tax purposes, will they be looking at the loan documents and see whose on title?
just in case DOS, will refi cure this problem?
Boss,
Q. thanks jeff, qualifying for the loan, will this be on the remaining 200k loan balance or will it be on the fmv of the existing home?
A. Whatever the parents "sold" the home for. E.I. if the home was "sold" for 200k that's all they'll have to get a loan for.
Q.to get the write off on the interest, do the children have to be on title via a quit claim deed? or for tax purposes, will they be looking at the loan documents and see whose on title?
A. Any person making the payment s on the property (on the deed or not) is entitled to the tax releif. If someone else claims the tax write off it's illegal only the person actually making payments can get the write off.
Q.just in case DOS, will refi cure this problem?
A. Yes
Hope that helped. Good Luck.
aimee :-D
[ Edited by tGiREi on Date 05/13/2004 ]
One addition:
If the children want to, they can get a loan of any amount, up to the FMV. When the new loan is made, the old loan will be paid off. If they want to pull some cash out, they could refi for $300K and get $100K (minus closing costs) in cash. Or once they are on the title, they can open a HELOC and use that cash to do whatever: buy other properties, update this one and then sell it at retail, buy an apartment building, or just go on vacation.
On another note, they need to think of the tax consequences. To minimize taxes on both the parents and kids, their are several options: the parents can put the house in trust for the kids, they can gift the house to them, or they can sell it to them. As a second home, there are different rules, so you want to check with an attorney.
Lots of options, especially with 1/2 Mil in equity. If only it were me....
Peter