Home Page link  

Payback "Gift Of Equity"

  
Groups | Search | About
User Password
Register Now! Lost Password?

Taxes General Forum - Tax professionals meeting place and answers to queries. (Moderated)

 Post an article  get this group's latest topics as an RSS feed add this group's latest topics to your My MSN content add this group's latest topics to your My Yahoo content  add this group's latest topics to your Google content  YahooMyWeb Yahoo!  Google Google  Windows Live Favorites Windows Live  del.icio.us del.icio.us  digg digg  Add to Netscape Netscape
Subject Author Date
Payback "Gift Of Equity" mroterdam 03-10-2007
Posted by mroterdam on March 10, 2007, 2:49 am
Please log in for more thread options
 my daughter and son-in-law will be purchasing our (wife and
I) investment home. They currently rent it with option to
buy. I wanted to run the following scenario by you regarding
their loan. The purchase price is $140,000.

The lender is splitting up the $140,000 loan as follows:

1st Mortgage: $112,000 (80%)
2nd Mortgage: $28,000 (20%).

On closing day we will receive $112,000 (instead of
$140,000) and offer them a "gift of equity" of $28,000. Then
1 week later, the kids will take out a 2nd mortgage for
$28,000 and turn around paying us the remaining equity of
$28,000. By doing this, they will get favorable rates on the
1st mortgage and not have to pay PMI. For us, it seems to be
a wash whether it is done this way in parts, or one shot.
However, there might be tax consequences.

What might these be? Is this practice legitimate? BTW, we
will have lived in this house 2 out of the past 5 years.

I look forward to your response.

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Ernie Klein on March 11, 2007, 4:09 am
Please log in for more thread options
 mroterdam@gmail.com wrote:

> my daughter and son-in-law will be purchasing our (wife and
> I) investment home. They currently rent it with option to
> buy. I wanted to run the following scenario by you regarding
> their loan. The purchase price is $140,000.
>
> The lender is splitting up the $140,000 loan as follows:
>
> 1st Mortgage: $112,000 (80%)
> 2nd Mortgage: $28,000 (20%).
>
> On closing day we will receive $112,000 (instead of
> $140,000) and offer them a "gift of equity" of $28,000. Then
> 1 week later, the kids will take out a 2nd mortgage for

Then it is not a gift at all, but a temporary (1 week) loan.

Does lender #1 know about loan #2, or are their rates based
on the 'new' selling price of $112K?

I don't see how this is any different than if they were
buying a home from a 3rd party and you gave them a 'gift' of
$28K for their down payment as I did when my daughter bought
a home. The lender, of course, wanted to know the source of
the down payment (about 50K in my case). I had to provide a
letter to the lender stating that I was the source of the
down payment and that it was a gift.

Note, that 'gift' means no strings attached, no expectation
of being paid back _ever_. If my gift had conditions, such
as my being paid back some time in the future, and the
purpose of it was to get more favorable loan rates, then it
wouldn't have been a gift at all, but rather a fraud on the
lender, which is a crime.

I don't know if that is what you are doing or not - it
sounds like it - so be careful.

--
-Ernie-

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Seth Breidbart on March 11, 2007, 12:23 pm
Please log in for more thread options

> my daughter and son-in-law will be purchasing our (wife and
> I) investment home. They currently rent it with option to
> buy. I wanted to run the following scenario by you regarding
> their loan. The purchase price is $140,000.
>
> The lender is splitting up the $140,000 loan as follows:
>
> 1st Mortgage: $112,000 (80%)
> 2nd Mortgage: $28,000 (20%).
>
> On closing day we will receive $112,000 (instead of
> $140,000) and offer them a "gift of equity" of $28,000. Then
> 1 week later, the kids will take out a 2nd mortgage for
> $28,000 and turn around paying us the remaining equity of
> $28,000.

Why are they doing that? They don't owe you anything, you
gave them a gift.

> By doing this, they will get favorable rates on the
> 1st mortgage and not have to pay PMI. For us, it seems to be
> a wash whether it is done this way in parts, or one shot.
> However, there might be tax consequences.
>
> What might these be? Is this practice legitimate?

It sounds to me like fraud against the lender; however, if
the lender suggested it, then it might be OK (but see an
attorney: the person who suggested it might not be
sufficiently placed at the lender to protect you from the
fraud charge).

> BTW, we will have lived in this house 2 out of the past
> 5 years.

If you've also owned it that long, then your profit isn't
taxable.

Seth

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by mroterdam on March 12, 2007, 8:54 pm
Please log in for more thread options
> mroter...@gmail.com wrote:

>> my daughter and son-in-law will be purchasing our (wife and
>> I) investment home. They currently rent it with option to
>> buy. I wanted to run the following scenario by you regarding
>> their loan. The purchase price is $140,000.
>>
>> The lender is splitting up the $140,000 loan as follows:
>>
>> 1st Mortgage: $112,000 (80%)
>> 2nd Mortgage: $28,000 (20%).
>>
>> On closing day we will receive $112,000 (instead of
>> $140,000) and offer them a "gift of equity" of $28,000. Then
>> 1 week later, the kids will take out a 2nd mortgage for

> Then it is not a gift at all, but a temporary (1 week) loan.
>
> Does lender #1 know about loan #2, or are their rates based
> on the 'new' selling price of $112K?
>
> I don't see how this is any different than if they were
> buying a home from a 3rd party and you gave them a 'gift' of
> $28K for their down payment as I did when my daughter bought
> a home. The lender, of course, wanted to know the source of
> the down payment (about 50K in my case). I had to provide a
> letter to the lender stating that I was the source of the
> down payment and that it was a gift.
>
> Note, that 'gift' means no strings attached, no expectation
> of being paid back _ever_. If my gift had conditions, such
> as my being paid back some time in the future, and the
> purpose of it was to get more favorable loan rates, then it
> wouldn't have been a gift at all, but rather a fraud on the
> lender, which is a crime.
>
> I don't know if that is what you are doing or not - it
> sounds like it - so be careful.

thank you for responding. This whole thing is per suggestion
of my daughter and son-in-law's lender. The lender will be
handling the 1st and 2nd mortgages. My wife and I filled
out a "gift of equity" letter to the lender. I agree this
is not a true "gift" by definition.

Thank you

<< ======================================================= >>
<< 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 (2006) - All rights reserved. >>
<< ======================================================= >>

Similar ThreadsPosted
Equity Line used to buy Tax free Bonds March 31, 2008, 8:20 am
investment cost - home equity v.s. margin July 25, 2007, 6:22 pm
Re: investment cost - home equity v.s. margin July 31, 2007, 3:37 pm
Re: investment cost - home equity v.s. margin August 1, 2007, 4:26 pm
Can I buy a foreclosure and repair the house with a Home Equity Loan? January 15, 2007, 2:26 am
Can I purchase an equity interest in family real estate w/o tax consequences February 27, 2008, 4:37 pm
Large Monetary Gift - Gift Tax Question May 22, 2007, 11:38 pm
Large Monetary Gift - Gift Tax Question May 25, 2007, 1:41 pm
Is this a gift? December 4, 2006, 5:57 pm
The Twice Given Gift September 16, 2007, 3:27 am

Contact Us | Privacy Policy
This site is not affiliated with Intuit - makers of Quickbooks and Quicken software
This site is not affiliated with Sage Software - makers of Peachtree accounting software
XML SitemapXML Sitemap