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Subject Author Date
Tax consequences of family loan? AES 09-20-2007
Posted by AES on September 20, 2007, 10:46 pm
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 Divorcing son needs immediate financial assistance (over and
above mortgage loan he can obtain) to buy out
daughter-in-law's share of their family residence.

Retired parents propose to get amount of cash needed by son
from a home equity line of credit on their primary
residence, or on second residence/vacation home (both of
these currently fully paid for, and they do reside in each
part of the year), and loan it to son as an effectively
interest-only note.

Son then will then pay parents on this internal family loan;
parents will pay interest on the home equity loan.
Assumption is that principal will ultimately be recovered
either by gradual voluntary repayments from son, or from
son's share of expected inheritance at parents' second
death.

Question is how to determine monthly amount son should pay
parents monthly so that it will all be legal tax wise, and
the deal will be net a wash for the parents

Further consideration are that parents are in max tax
bracket at the margin on their joint return but are not yet
hit by AMT, and they will presumably (?) be able to take
itemized tax deduction for their interest payments on the
HEL, as they have in the past when they used money from it
for other purposes. Son presumably can not deduct his
interest payments to parents; these payments may or may not
(???) be taxable income to parents.

Any tax counsel on this? Or alternative ways to structure
it?

If they do this

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Posted by Seth on September 23, 2007, 7:45 pm
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> Divorcing son needs immediate financial assistance (over and
> above mortgage loan he can obtain) to buy out
> daughter-in-law's share of their family residence.
>
> Son presumably can not deduct his
> interest payments to parents;

Why not? It's mortgage payments.

> these payments may or may not
> (???) be taxable income to parents.

They are taxable to parents; if the rate is the same as the
parents pay on their loan, it's a wash.

Seth

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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. >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by joetaxpayer on September 23, 2007, 7:45 pm
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AES wrote:

> Retired parents propose to get amount of cash needed by son
> from a home equity line of credit on their primary
> residence, or on second residence/vacation home (both of
> these currently fully paid for, and they do reside in each
> part of the year), and loan it to son as an effectively
> interest-only note.
>
> Question is how to determine monthly amount son should pay
> parents monthly so that it will all be legal tax wise, and
> the deal will be net a wash for the parents
>
> Further consideration are that parents are in max tax
> bracket at the margin on their joint return but are not yet
> hit by AMT, and they will presumably (?) be able to take
> itemized tax deduction for their interest payments on the
> HEL, as they have in the past when they used money from it
> for other purposes. Son presumably can not deduct his
> interest payments to parents; these payments may or may not
> (???) be taxable income to parents.

If the parents make the loan legit, i.e. have a written
contract in place and place a second lien on the son's
property, the interest the son pays is a deduction to him,
and would net out to the parents. Why would you presume the
son cannot deduct legitimate interest payments? The rate
should be a reasonable market rate, there are IRS docs that
should indicate a minimum rate. Even then the parents can
gift the son $24,000/yr to help him out.

JOE

<< ------------------------------------------------------- >>
<< 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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Posted by AES on September 24, 2007, 8:47 pm
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> If the parents make the loan legit, i.e. have a written
> contract in place and place a second lien on the son's
> property, the interest the son pays is a deduction to him,
> and would net out to the parents. Why would you presume the
> son cannot deduct legitimate interest payments?

Because I was supposing that the parents would just make a
"family loan" to the son, documented by some simple written
note or instrument, but no more than that.

I hadn't thought about the parents actually taking some kind
of second lien on the son's property, so that the money he
borrows is actually secured by an encumbrance on his
residence (which then makes his interest payments to the
parents deductible to him, if I understand what you're
saying).

Is a "second lien" essentially the same as a "second
mortgage"?

And can the parents in essence go into the business of
marketing second mortgages (even if it's only one such
mortgage, to their own son) without running into all sorts
of legal requirements for having a business license and the
like?

<< ------------------------------------------------------- >>
<< 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. >>
<< ------------------------------------------------------- >>

Posted by joetaxpayer on September 25, 2007, 11:41 pm
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AES wrote:

> I hadn't thought about the parents actually taking some kind
> of second lien on the son's property, so that the money he
> borrows is actually secured by an encumbrance on his
> residence (which then makes his interest payments to the
> parents deductible to him, if I understand what you're
> saying).

you got it right. Going through that slight expense and
effort makes the loan legit, taxwise.

> Is a "second lien" essentially the same as a "second
> mortgage"?

well, a mortgage is a loan, a lien is an encumbrance on
property, a mortgage without a lien is like a pit bull with
no teeth. something like that.

> And can the parents in essence go into the business of
> marketing second mortgages (even if it's only one such
> mortgage, to their own son) without running into all sorts
> of legal requirements for having a business license and the
> like?

I don't know what level of lending requires a license, I do
know loans of this type to family members do not.

JOE

<< ------------------------------------------------------- >>
<< 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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