I want to buy a $98000 home for cash. Then sell it to my son and daughter in law with 0% mtg interest over 30 yrs. Tthey will never have the money to buy a home because of income requirements and are getting squeezed by rental increases.
Think this is better than an outright gift for down payment as closing and mtg. costs will burden them. Then this doesn't sound like a gift to his siblings either!
Other than not doing business with family members, any downsides to this scheme?
tks all
You are required by tax law to charge them interest. For a 30 year loan the minimum interest rate for this month is 2.13% if they make payments monthly.
If no interest is charged or paid, either they will have to pay tax on interest they didn't have to pay, or you will have to pay tax on interest you didn't receive.
You have to charge them interest, but you can forgive some of the principal, and that could keep payments lower. Or you could give a gift of some of the principal in the beginning, so that the payments including interest would be the same as what you are planning.
If you charge no interest, the payments will be $272.22 per month. If you charge the minimum interest, the payments will be $368.63. To have the lower payment and still charge interest, the principal would have to be about $72,370, which would mean you'd have to make a gift to them of almost $26,000 of the principal.
Or you could charge them $368.63, forgive $96.41 of principal each month, and recognize $96.41 of interest received.
There's no perfect way to do this, unfortunately. You will have to decide which factors are the most important when you choose which way to approach this.
Stu
I have a closely related question. My son/ wife were faced with a pending $18k/year FEMA fllood insurance premium (was $2.4k). My wife/ I then paid off their existing mortgage. With an attorney assisting, we then financed their house, at the then minimum IRS interest rate. That loan was registered with their local city office.
My question. We have, annually, charged them interest, but at year end we have Gifted them the amount of their interest due. Indeed my wife / I have gifted the IRS max - 4 x $14k- $56k (we each gift both our son and wife). Beyond that annual interest due, we use the balance to reduce their principal.
Does the IRS allow one to Gift their miniumum required mortgage interest?
We have never put their interest payments on OUR IRS return (gifted back to them). They have never claimed an IRS mortgage interest dedcution. Is that IRS acceptable?
Well, yes, you can gift it. But not without consequences.
One of you is required to claim the interest on your taxes, even though it was a gift. If you had received the interest, you would have been taxed on it. You can't avoid that tax by giving it away.
In the alternative, since you didn't receive it, you may not need to recognize the interest as income. But in that case your kids do need to recognize it, as cancellation of debt income. If they recognize it as income, they can then deduct it on their taxes if they have sufficient other deductions to make it worth while.
So the parents should report the interest and pay tax on it. The son/wife report paying the mortgage interest and take the deduction. Then they get the gift, which reimburses them for the interest. In effect, the parents would be giving them an interest-free loan, and then also paying the tax on the interest that they're not charging.
Stu
Thank you for your sage advise.
Clearly my wife/I are not complyiing with the IRS rules, as you note!
We have never declared that mortgage interst income IRS (and CT) , nor has my son ever claimed an IRS/ CT interst deduction. My son has paid us the IRS required monthly mortgage payment - P&I - but we have "gifted" them that amount annually. As I noted, we have annually gifted them $56k - which far exceeds the IRS required interest payment.
I wonder what our next IRS/ CT tax step should be?
Talk to a tax preparation professional (CPA or Enrolled Agent). That person can look at your tax records and determine if there is enough money involved to do anything about it. If there is, it might be a good idea to file amended returns. But talk to a tax pro.
It appears not only do I have to charge interest but I have to declare it as income on my return and son doesn't itemize. Apparently the only way to keep his payment down is to gift him the monthly interest ea. month then he adds the gift amount to his payment and IRS is happy. Does this work?
One option: he claims the unpaid interest as income on his taxes (about $2500 the first year, lower each year after that) and then can deduct the payment as home loan interest; or
You can claim the the unpaid interest as taxable income on your tax return.
You can reduce that (in the long run) by gifting principal reduction each year as well. That would make each succeeding payment more principal and less interest, resulting in less that has to be claimed as taxable.
However that would reduce the payments made to you over time, and I am not sure if you want to do that.
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