Home Sold To Family Member

[GTS1101]

I have a client who recently refinanced their residence to take out cash so that they could buy a house for their son. They took out 235,000 to invest in this home in Feb 2007. The husband, wife, and son are on title. The refinanced loan is on the orignial residence and only in the name of the husband and wife. The son is now buying the house from his parents for 235,000. He took out an equity loan on the home and gave a check in the amount of 50,000 to the mortgage company of his parents loan as a down payment on his place. He is now paying them approx 1,500 month until the 185,000 is paid off. The check goes to the parents and then they apply to their first mortgage loan. There is no gain or loss on the sale so I am assuming there are no tax consequences. I am not sure though and I appreciate any insights you could give me as how to handle this situation.

Thanks!

GTS1101

[Kram BergGold]

My take

First, as I understand the law, the parents now have a $185,000 home equity loan they are paying on. They can deduct interest on 100k of it, subject to AMT, and can't deduct the rest. This loan is not home aquisition debt as the loan is not on the house that was bought. Next, there may be issues with interest free loans and imputed interest although I think you can get around this by saying the son did not borrow money because he only owns the % that he has paid for. If you go this route then I say everytime the son makes principal payments to the parents they have a reportable sale with no gain as he is buying it at cost.

[GTS1101]

Clairfication about the loan

I believe I confused you in my message. The parents only have one loan on their original residence. They refinanced that loan at a higher amount because of the equity they had in their home and bought the house for their son. This second house they bought has all three on title the husband, wife, and son. The parents on their original residence still only have one loan at a higher amount on their home. Now the son is buying the second home from his parents. Because he was on title he was able to take out his own equity line on that second home. He took out 235,000 and he paid his parents 50,000 upfront to apply and paydown their mortgage. He is now paying them about 1,500 month until the 185,000 is paid off to his parents as he owes them a total of 235,000 the original cost his parents paid for the house. The son took out the equity so he can also have a tax writeoff.

Thanks for you help!

GTS1101

[totb2007]

Does it count as a gift at the time the parents put the son on the title? He didn't make any payments? He's not responsible for the loan?

[taxea]

home sold to family member

This is not a home the parents lived in...it is a second home. If each is on the mortgage then each has a basis in the home and, in,essance, the parents are "selling" their collective share of the home to their son. They should have a written installment agreement with the son...the IRS would expect the parents are receiving interest on the sale. Whether or not they are, they should understand that this is, in fact, an installment sale of which the income is reportable and an alloted portion of their basis recoverable each year. Any interest paid would be taxable and yes, the sale should be reported. taxea