Section 121 Exclusion

[Burke]

TP is selling personal residence to son & daughter-in-law for FMV. Son & DIL do not qualify for loan on their own, and bank loan officer told seller they could not qualify for 121 exclusion if they co-signed the loan. Does this have any bearing on exclusion from gain under 121 assuming they meet all other requirements? I never heard of this before and I can't seem to find anything on related party sales of a personal residence. I know they could not take a loss. It would be a personal residence for buyers.

[MDEA]

Section 121 Exclusion

Their names may have to be on the deed.Than they will still own a small percentage of the property.

[Roland Slugg]

The bank's loan officer is mistaken. There is nothing in the Code (§121) or Regs (§1.121-1, 3 or 4) that prohibits this. The only prohibition on getting the exclusion is for the sale of a remainder interest. In that case, the exclusion is not available if the other party is a relative. (Regs §1.121-4(e)(2)(ii)(B))

Cosigning a loan does not mean the sellers have retained an ownership interest in the property. Their names will not be on the deed, but only on the loan documents as cosigners/guarantors.

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Commentary: You didn't ask this board, and your clients probably didn't ask you, but I would like to offer a piece of advice. Cosigning a loan is almost always a very bad idea ... even for a son, daughter or other relative. The cosigner takes all the risk, for little or no reward. I have long advocated that if someone cosigns a loan, he should demand a hefty up-front fee to compensate him for the risk he is assuming as well as the unseen costs, such as a lowering of his own credit rating. You or your client can read others' opinions on cosigning loans by doing a simple Google search. There is a very good article by Bankrate.com titled ... "Top ten reasons not to co-sign on a loan."

[TaxGuyBill]

I've never heard of it either. My suspicion is that the loan officer does not know what he is talking about.

Even if their names were still on the deed, the §121 exclusion applies to the sale of a partial interest (but there may be restrictions on that, I would need to look that one up).


EDIT: I see that Roland pointed out that there is a restriction to a partial interest.

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[veritas]

Loan officers

Have supplanted life insurance salesman as my least favorite people.

[MDEA]

section 121 exclusion

Why don't they let them obtain a first mortgage for what ever they qualify for and then give them a second mortgage interest only for the amount owed. I have had clients do this with their children.

[Burke]

To Roland Slugg response: (which for some reason the Quote function will not work.) This question came from a financial planner I work with regarding one of his clients and I told him all of the above, including the dangers of co-signing a loan which I do not recommend either.

PS: Tried using Quote on other messages in this thread, and they worked except for Slugg and Tax Guy. I notice both of them used dashes in the text. Would this prohibit Quoting?

[TaxGuyBill]

Would this prohibit Quoting?

I have that happen several times (apparently not now though). There also have been several times that I've tried to "edit" my text (usually spelling errors) and it just gives me a blank area (my original text completely disappears when I try to edit).

[Snaggletooth]

If I were King

"Commentary: You didn't ask this board, and your clients probably didn't ask you, but I would like to offer a piece of advice. Cosigning a loan is almost always a very bad idea ... even for a son, daughter or other relative. The cosigner takes all the risk, for little or no reward. I have long advocated that if someone cosigns a loan, he should demand a hefty up-front fee to compensate him for the risk he is assuming as well as the unseen costs, such as a lowering of his own credit rating. You or your client can read others' opinions on cosigning loans by doing a simple Google search. There is a very good article by Bankrate.com titled ... "Top ten reasons not to co-sign on a loan."

Sluggo, if I were King, I would make co-signing against the law. The principle is always someone the bank has already given up on. If the co-signer would demand an up front fee, the principle would never have the money to pay it. Unfortunately, people will do things for their children they wouldn't even consider doing for anyone else. This is universal, and in some cases I have done so to a minimal extent.

It's very much like renting a house to kin-folks. In most situations the "kin folks" just say "well, THIS MONTH things are just tight and we don't have the rent." Last month was very similar, where they didn't have enough for anything except beer and drugs. There are situations where such an arrangement works out nicely, but they are in the minority.

[DaveO]

Maybe the TP should consider an installment sale instead of co-signing. At least that way they would have the interest income. As far as co-signing the banks are cowards. Just like they want comfort letters from us to relive them of proper due diligence they seek a co-signer to mitigate their credit risk.