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Posted by NadCixelsyd on February 27, 2008, 4:37 pm
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My son wants to buy a condo for $150k. Our agreement is as follows:
I give him $50,000 for the down payment and he gets a $100k mortgage.
However, it's not a gift. It has the following condition: When the
property is sold, the $50,000 is to be returned. In addition, I will
get 50% of the capital gain at the time of sale. (e.g. If we sold the
property for $250,000, I would get $100,000.)
My step-up in equity (33% to 50%) is offset by his promise to pay all
expenses (like the mortgage and taxes) in the interim. It's not an
interest-free loan, it's an equity purchase. Or is it???
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Posted by Stuart Bronstein on February 27, 2008, 4:57 pm
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> My son wants to buy a condo for $150k. Our agreement is as
> follows: I give him $50,000 for the down payment and he gets a
> $100k mortgage. However, it's not a gift. It has the following
> condition: When the property is sold, the $50,000 is to be
> returned. In addition, I will get 50% of the capital gain at the
> time of sale. (e.g. If we sold the property for $250,000, I would
> get $100,000.)
>
> My step-up in equity (33% to 50%) is offset by his promise to pay
> all expenses (like the mortgage and taxes) in the interim. It's
> not an interest-free loan, it's an equity purchase. Or is it???
Aside from the issue of who who claims what for tax purposes (a
question not specifically asked), this isn't a tax question. But I'll
give a brief answer anyway.
It depends on a lot of things, and could go either way. Or it could be
a security (e.g. stock), which is neither but sort of in between.
You should have a written agreement detailing exactly what is to happen
under what circumstances. If you want claim an equity interest you
should also either put your name on title or put title into the name of
a partnership. In your agreement detail who claims what income and
write-offs for tax purposes, but be sure to run those buy an accountant
or tax lawyer to be sure they reflect "economic reality."
There are probably other particulars that I can't think of off the top
of my head.
Stu
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Posted by removeps-groups@yahoo.com on February 27, 2008, 8:21 pm
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> My son wants to buy a condo for $150k. Our agreement is as follows:
> I give him $50,000 for the down payment and he gets a $100k mortgage.
> However, it's not a gift. It has the following condition: When the
> property is sold, the $50,000 is to be returned. In addition, I will
> get 50% of the capital gain at the time of sale. (e.g. If we sold the
> property for $250,000, I would get $100,000.)
This topic has come up in this newsgroup before. The interest that
you could have charged on the 50k is considered a gift. See
http://supreme.justia.com/us/465/330/case.html. However, on 50k it
would probably be well under 12k.
The 100k you would get at the end would be income to you. I don't
know if doing a partnership return would help you in anyway (in order
to take advantage of the 250k exclusion).
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by Stuart Bronstein on February 27, 2008, 9:06 pm
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>> My son wants to buy a condo for $150k. Our agreement is as
>> follows: I give him $50,000 for the down payment and he gets a
>> $100k mortgage. However, it's not a gift. It has the following
>> condition: When the property is sold, the $50,000 is to be
>> returned. In addition, I will get 50% of the capital gain at the
>> time of sale. (e.g. If we sold the property for $250,000, I
>> would get $100,000.)
>
> This topic has come up in this newsgroup before. The interest
> that you could have charged on the 50k is considered a gift. See
> http://supreme.justia.com/us/465/330/case.html. However, on 50k
> it would probably be well under 12k.
That's assuming it's actually a gift. If it's either a loan or an
investment of some kind, it's not a gift and no gift tax is incurred.
Since Dad expects to get his money back (especially if they put an
agreement to that effect in writing), and with interest to boot, I
doubt there's any kind of gift involved.
> The 100k you would get at the end would be income to you. I don't
> know if doing a partnership return would help you in anyway (in
> order to take advantage of the 250k exclusion).
If the $50,000 is a gift, why would a payment back from his son of
$100,000 be anything other than a gift?
On the other hand since the $50,000 is either a loan or an
investment, his receipt of that back will be tax free, and the
balance will either be ordinary income (if it's a loan) or capital
gain (if it's an investment).
Unless the father actually lives there and has his name on the title
to the property, the $250,000 exemption does not apply.
Stu
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by removeps-groups@yahoo.com on February 28, 2008, 2:44 pm
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> That's assuming it's actually a gift. If it's either a loan or an
> investment of some kind, it's not a gift and no gift tax is incurred.
> Since Dad expects to get his money back (especially if they put an
> agreement to that effect in writing), and with interest to boot, I
> doubt there's any kind of gift involved.
According to the court case, the intra-family loan is subject to the
gift tax. The principal of 50k itself is not taxable, as it is the
loan. Of course, the terms of the loan should be in writing so that
the IRS does not construe the principal as income. However, the
interest that could have been charged (ie. the "imputed interest") is
a gift.
Suppose I lend my famliy member 10 million interest-free, and they
will pay it back. The interest and dividends (assuming I lent them
stock) would be so huge in one month - about 41k assuming 5% a year.
After 3 months they would pay back the 10 million, but they would have
41k*3=123k in interest. So according to the IRS, this interest is a
gift, and the person who lent the money must either pay gift tax or
take it out of their lifetime exclusion.
The original post had an amount of 50k, and at 5% a year the imputed
interest is $2,500 a year. Nothing to worry about, unless he is also
sending his son large checks seperately.
As an aside, if the parent invest that 50k in a 10 year bond, he would
get 3.7% interest a year (today's rate), free of state tax.
My thinking is that if you want to avoid gift tax issues you must
charge interest, and furthermore the interest should be a fair market
value, not discount. Then you would report the income on your tax
return, and the person paying the interest may be able to deduct the
interest if it is qualified loan. But what is a fair market interest
rate?
> Unless the father actually lives there and has his name on the title
> to the property, the $250,000 exemption does not apply.
Good point. Now if a home is jointly owned by two people but only one
lived in the house, is the exemption still 250k or is it reduced to
125k?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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