Paying Cash
Hi all. Here is our situation.
We are buing our first property. It is my grandmothers house. The purchase price is 25K. In order to avoid all of the closing costs, escrow, ect. we are paying cash to my parents. We have 20K and they are loaning us the extra 6000 to pay for the remainder and extra closing costs. (pretty nice of them). Anyway, we told them that after closing we would get a home equity loan to pay them back.
My father offered today for us to just pay them 250/mo for 2 years no interest to repay the 6000. I am not very informed about how much deduction we would be able to claim if we took out the HOL. Would it be worth it?
We plan to rent the property for about 500/month. Of course then we would pay or own taxes and insurance so our +cash flow would be about 150/month.
Any advice would be appreciated.
Kim
Western PA
if your dad record a 2nd of the property, the interest you pay him would be deductible. back engineer on interest rate just that the total is still 6000 (or more)
The other thing to look at is a gift of the 6K. or more to reduce thier tax exposure.
cjmazur,
Where in the tax regs can I find support for your comment that suggests that a gift reduces the giver's tax exposure, when the gift is NOT a charitable contribution?
I can't seem to confirm that your "advice" has any foundation in the tax regs. Would you help me out?
I can give anyone (tax free) 10K a year per spouse, per person. If mom and dad ea. gifted 12.5 (20 ea. allowed), they would incur no cap gains.
It does have an impact on some lifetime gift or estate limit.
nop for most people
(I stand corrected, it's now 11K)
From:
Tax Tip 2004-38, Feb. 25, 2004
If you gave any one person gifts valued at more than $11,000 in 2003, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.
The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.
You make a gift when you give property (including money), or the use or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:
Tuition or medical expenses that you pay directly to an educational or medical institution or health care provider for someone's benefit
Gifts to your spouse
Gifts to a political organization for its use
Gifts to charities
If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. That means that both you and your spouse could each have given up to $11,000 to the same person in 2003 without being liable for gift taxes.
cjmazur,
The IRS rule on the gift tax exclusion is interesting, but this does not explain your comment "The other thing to look at is a gift of the 6K. or more to reduce thier tax exposure".
If I give someone $6K (no gift taxes), how does that reduce my tax exposure? Since gift taxes are not assessed on amounts below $11K annually per person, what tax exposure is being reduced?[ Edited by NewKidinTown on Date 06/02/2004 ]
In this case, they would pay cap gains on the 6K is it's part of the purchase price. and wouldn't if it's a gift.
I’m a little confused here. The original post from Kim said they were paying their parents 20k now, and could pay an additional 250 mo. (interest free) for two years on the balance. No existing loans, no new loans, no lenders, no need for a second or to even tie the 6k loan to the property if they don’t want to. It’s just a payment of 250 mo. to the parents. Kim can’t write that 250 off (as there's no interest), and if it’s for repayment of a "personal" loan, why would there be any reason for the parents to even declare it as income? What am i missing?
In order for a loan to be a loan, it must charge interest.
So the 6K "free loan" would most likely be called a gift.
If cash flow to mom and dad is not important to them, why not max out the gift?
If Kim then wants to send them on a 20K vacation, that a different matter.
Also I didn't FMV mentioned, so that potentially another taxable discount.
Thanks cjmazur,
I was looking at this as a situation (or opportunity) where they could make whatever arrangements they wanted to pay back the parents, and not get into anything formal or documented – thereby avoiding all kind of issues.
BTW, I have a couple of "no-interest" car loans. I sure wish I could convince them that they’re really a gift! LOL
Thanks again!
I will have to look into the tax laws on gifting $ and tell my parents about it. The original 20K is our money, they are just loaning (gifting?) us the balance. The house is my grandmothers, she is in a nursing home so all of the procedes are going to the NH post sale.
The FMV on the home is 34K.
--- I just looked on the IRS site and there was nothing about the giver being able to deduct a gift from their taxes. Am I looking in the wrong place?
Kim[ Edited by kasm on Date 06/02/2004 ]
Not that the 6K gift is deductible, but the 6k from the loan/sale is a cap gain.
Check out the tax consequences of the difference btwn 25K and FMV.
Or do you even care? Make it alot about nothing.
cjmazur,
I think you have made this situation terribly confusing for everyone. Here are my opinions on the tax treatments that may apply.
First, the background.Kim is buying her grandmother's house for its FMV of $34K.. The purchase price breaks down to $25K cash and a $9K gift of equity from the grandmother.Kim's parents will loan Kim $5K toward the purchase and another $1K to cover closing costs.Kim will repay the $6K loan in 24 equal installments at zero interest.
Now, let's identify the tax consequences.
For grandmotherIf the difference between her cost basis and the $34K "sale" price is a profit, the profit is a taxable capital gain.All of the gain might qualify for exclusion if grandmother meets the two year rules under Section 121.Since the $9K gift of equity is less than the annual gift exclusion of $11K per person, the gift is tax free.Unless grandmother has given Kim other gifts during the year so that Kim (or anyone else) has received in excess of $11K in gifts during the year, grandmother has no requirement to file a Gift Tax Return.While not an income tax consequence, a gift of equity may come under scrutiny if grandmother is applying for or receiving Medicaid, and may result in a partial reduction of Medicaid benefits for a period of time.For the parentsThe $6K loan is a zero interest loan -- not a gift.A loan is money given with the expectation that it will be repaid. A loan does not have to include interest to be characterized as a loan. The IRS has rules concerning zero interest loans that require the lender to "impute" interest, but I believe the imputed interest rule does not apply when the amount involved is less than $10K.The parents have not made a gift because they expect their loan to be repaid, and have even agreed to a repayment schedule. No gift tax issues are in play here.For KimThe initial cost basis for the property is $34K. The grandmother's gift of equity is added to the cash given to arrive at Kim's initial cost basis. Kim can add some of the closing and settlement costs to the basis, making the adjusted basis a little larger than $34K.A gift received is not taxable income to the recipient.Just how I see it. Kim should print out this thread and give it to a licensed tax advisor to get a professional opinion.
[ Edited by NewKidinTown on Date 06/03/2004 ]
Thank you all! I will print this and keep it in my records with the purchase.
Kim
Sorry if I confussed anyone, certainly not my intent.
The point I was trying to make is the consequencies of the actions we do or don't take in terms of taxes, etc. and alternate ways to view them.
For 6k, 26k or 30somethingk, the point is moot, but I appreciate post that expand the specific concept to the general.
From http://money.cnn.com
Or, maybe you'd rather have an informal agreement with your child, who agrees to pay you back at a nominal interest rate. Since the Internal Revenue Service views with suspicion loans made at rates far below market value, it may recharacterize the loan as a gift, Adam said.
The consequences of that are manifold: you will not be owed anything; the loan will be subject to a gift tax if it exceeds $10,000; and the money will no longer be included as part of your estate and hence cannot be counted as part of your $675,000 exemption from estate tax.
"Why put yourself in a position when the burden of proof is on you and you're arguing with the IRS?" she said.
If it was me, I'd do the following:
-if your not concerned about title history or any of that, get the house in your name in the simplest manner possible (ie a paralegal service)
-pay the $20k and agree to the $6k loan as a personal, unsecured, undocumented loan and pay your folks back as requested.
-refinance the property to get your $20k out. (Cashflow should still be slightly positive.)
-buy another property.