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Parent Financed Mortgage

My son/ wife live in a house that FEMA has deemed to be a high flood risk (I do not know the exact FEMA declaration). His flood insurance would have increased from $2,400 to over $14K. They could not afford that usurious increase. In 2014 my wife/I provided them with our self financed (i.e. we own/ wrote their mortgage) loan. We did not have them purchase any flood insurance.

We used an attorney, to register that new loan with his city. He has a CPA, whom will prepare an 2014 IRS income statement, reflecting his loan payments to us. He will thus also have an IRS record, for deducting their interest payments; and our interest income.

My tax question: Can my wife/ I give my son/ wife a gift check equal to their mortgage payments made to us? Would we be creating any IRS issues/ red flags? Their net payments (P&I) are about $14k; thus we would like to Gift ~$7K each to both my son and his wife.

Note: I doubt this is a related tax issue? In 2012/ 13 we gave them over $100k, via multiple Gifts (8 x $13,500) over those two years, for their initial down payment.

Reply to
Dave C
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You can give them gifts of principal, but gifts of interest can cause problems, though not necessarily large ones. If you forgive interest, either you will have to recognize the interest as income anyway, or your son will have to recognize the interest as cancellation of debt income.

As long as they actually make the payments, you can gift the money back to them. If they actually send you checks, you can even forgive each payment and just not cash the checks. But if the IRS checks you will have to show them that the checks were actually sent to you, and you made the decision each time not to cash it.

Another way to deal with this would be to simply forgive $56,000 of principal each year, while your son and his wife made regular payments to you. That would allow the debt to be fully satisfied more quickly.

Reply to
Stuart A. Bronstein

Thank you, for your most informative reply.

At the loan outset, my son set up an auto transfer, for their monthly payment into an account owned by my wife/ myself. Thus we have proof of receiving their mortgage payments.

I like the suggestion that we forgive $10k of principal, maybe each year (TBD). That is consitent with my goal that the cash gift be used for an investment. I will ask that their CPA, whom will prepare their IRS tax statement/ form (reporting their IRS mortgage loan) how best to credit the principal into the mortgage account. Maybe we can just ask the CPA, that the remaining principle balance be reduced by $10K?

With that new option, might I also ask:

If we were to "gift" all of their TY 2104 principal and interest payments, could we NOT have their payments be considered to be our taxable income; while my son would then lose any associated mortgage interest deduction? I assume that change needs to be complete before

12/31/14 ??

Note My wife/ I are now in a much higher marginal tax bracket, than my son/wife.

Reply to
Dave C

Again, there is a problem with gifting (or forgiving) interest payments owed to you. Someone has to claim the foregone interest on their tax returns. Either you do (because it's in effect paid and you gift it back) or your son does, because it's a debt that is forgiven and can't be considered a non-taxable gift.

It might be better for your son to claim the interest income. If your loan is secured by a mortgage, your son can deduct the interest as home mortgage interest, and in theory cancel out the income on the same thing.

A good reason to reduce principal instead of interest is that a reduction in principal automatically reduces the amount of interest owed, and will likely be more financially effective in the long run.

Reply to
Stuart A. Bronstein

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