My wife and brother-in-law are inheriting a small house from their mother. My BIL has a friend who has offered to buy it for a fair price, but needs us to hold a mortgage. My BIL is glad to do it, and it willing to take the whole mortgage and give us cash. Are there any problems with that? It kinda sounds like we are selling him our half, which would require taxes to be paid, and we certainly want to avoid that.
If you want to sell it to anybody, you will have to pay taxes on it. Of course the taxable income should be small because, as an inheritance, the cost bases is adjusted based on the date of death value.
I guess I didn't express myself clearly. I am not concerned about capital gains; we will be selling for less than either the assessment or the realtor's appraisal, so there won't be any capital gains. But that raises a question I never considered; if the house is "worth" $45,000 and we sell for $40,000 is there a capital loss?! I doubt it, but who knows...
But my real question is... We will be selling for $40,000; paid entirely by taking back a mortgage. My BIL would give my wife $18,000 (to reflect the risk involved in the mortgage) and keep keep the mortgage. Whatever happens then is his problem.
Any tax implications?
Unless it's been used for business purposes, it's unlikely that you will be able to write off any loss.
Let me get this straight. The basis (date of death value of the person it was inherited from) is $45,000, so the basis of your half is $22,500. But you are selling your half for $18,000. Is that right?
Assuming MIL was living in it when she died, and your wife and her brother didn't rent the place out in the mean time, it seems to me there are no tax implications.
if they didn't live in it, are they not holding the property for the production of income, rented or not? If that is the case, can they not recognize a capital loss?
isn't "the risk involved in the mortgage" supposed to be reflected in the interest rate?
They can reflect the rick involved in any way they want. One owner is getting cashed out, the other owner is taking a mortgage on both halves of the purchase price. I don't see anything wrong or unreasonable about the way they have it structured. And if OP is happy with it, what business is it of yours?
MIL lived in it until her death. We have not rented it out. Really want to get rid of it.
The potential buyer should be paying more than 3% to reflect the risk, but he is a friend of my BIL and is trusted much more than common sense would dictate. My wife wants to go along with it, and I don't want to argue with anyone. I don't want to get involved with the mortgage, but want to treat BIL fairly under the circumstances. Above all, I don't want any trouble with the IRS.
So, we can sell it for a $40k note that my BIL holds, and he gives me $18k. It is none of the IRS's business and everyone is happy. Right?
Thank much.
That sounds ok to me. Happy to see as you have thought it all through, even though it is no business of mine. (Actually, nothing anybody posts here is any business of mine or anyone else's, but that is not the point).
I concur. Even though MIL lived in the house, unless a living relative was using it after MIL's death, it's not personal-use property in the estate's hands or your hands, so a capital loss should be allowed. If the sale is below FMV (allowing for a "quick sale" discount to FMV, but not a "sale to friend" discount), it becomes a gift/sale, which is much more complicated.
-- Arthur Rubin CRTP in Brea, CA
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