Gift Taxes and Inheritance

[S T]

Question arose

Can taxpayer loan his son $100,000, on a legitimate note with interest, and if the t/p dies, the remainder of the outstanding balance on the note be deducted from his inheritance on the estate. There are two other siblings. And t/p does not want to make it a gift.

Does anyone have any reference to information on this?

Thanks,

Sandy

[Snaggletooth]

Absolutely

Sandy, this is exactly what will happen and should happen. Along with accrued interest, etc. The deceased estate becomes the owner of the note, and assuming this child's share exceeds the value of the note, the remaining amount becomes a matter of settlement. Since he is receiving part of his own note back, there will be skewed cash, but all can be taken into account.

No gift.

[S T]

Another Question

Thanks as usual Snags,

Another Question,

If t/p borrows out the equity on his personal home, for $100K, which then creates the mortgage interest, and he has a legitimate note (to son) with all spelled out including interest rate, terms, etc, can the t/p then deduct the mortgage interest as investment interest, understanding that he has to collect the interest on the note and report same on Schedule B.

Related party rules, so I am not sure?

Sandy

[Snaggletooth]

Option

Sandy, as the case now with all interest, the deductibility of any loan follows the use of the proceeds. This would tend to dictate investment interest expense in your example.

However, if this is a home loan (eligible for 1098 treatment), it is my understanding that deductibility on Schedule A interest "trumps" any other deductibility, at the option of the borrower.

In your example, the taxpayer would have the option of deducting on Form 4952, or on Schedule A under conventional home mortgage interest. (Actually Form 4952 is schedule A also). However, I believe once the taxpayer has made his choice, it is irrevocable.

I believe I am right, but I hope you hear from other board members.