Parent Funded Mortgage

For the minimum interest you the long term AFR:

When you file your tax return include form 6252: An alternative approach would be to "gift" your parents the money. This may or may not have tax consequences. If you want to go this route you should talk to someone that understands gifting, and can take a look at your financial situation

Do you think that going without insurance is wise? If there is a flood, it could be very, very expensive.

You don't need a lawyer - you can go to the IRS website and determine the minimum interest you need to charge. It is reevaluated and the interest rate can change every month, though once you set it up, you don't have to change your contract rate.

If you want your son to be able to deduct the interest payments, you will have to place a mortgage on the house. If there are title insurance companies in CT, they should be able to set it up, including drawing up all the documents. If not, you will be better off using a lawyer.

An alternative might be for you to subsidize his insurance - you can give up to $14,000 per person per year without having to file a gift tax return. If you are married you together can give him up to $28,000.

Another alternative might be for you to buy an interest in his house. You could then have him buy it back over time, or you can gift it back to him if you prefer. In that case there should be no interest, though the amount he might have to pay back might increase as the value of the property does.

We have flood insurance on our beach house, and the price is clearly appropriate for the risk. Small rivers have an unfortunate habit of becoming very large rivers when there's an unusual amount of rain.

If he can't afford $2400 for insurance, he surely can't afford to fix flood damage, which is *not* covered by regular home insurance. My advice would either be to figure out how to pay the insurance, or sell the house and move somewhere higher.

We made such a loan to my son although we do not have the complication of a river nearby. We did require fire insurance, but that is reasonable outside fire prone areas. He would have bought fire insurance anyway. We also have a first trust deed on the property.

The IRS publishes rates on a regular basis indicating minimum applicable rates that are sufficient to make his interest payments deductible to him. When those rates went down, we renegotiated the rate.

The IRS has bugged him on this arrangement already. But when he showed the receipts and cancelled checks, they stopped bothering him. I do report all the interest as income. It is the only income I get that is not reported to the IRS. I may not be doing it correctly, but I am also not trying to cheat on my taxes either.

So far, the IRS has given me no problem. By now, the interest rate is so low, that it is not a big tax advantage to my son. He is, however, paying the principle down much faster than he otherwise would do.

I have just described my experience on this matter. It may not be completely proper. but it works for us. We are small potatoes for the IRS. I have the feeling that there are other people much richer than me, who are gaming the system.

In any event, my relations with the IRS have been good. I keep on getting requests for more tax. Unfortunately, whenever they ask for more, I really did make a mistake. Once in a while they may actually say that I paid too much tax, and I get a refund. I do not question those decisions very thoroughly.

My son/ fiancee have only lived at this house for a bit over one year. Their immediate neighbors (and prior/ original owner) ALL note that there has never been a situation where his house was flooded. There was one instance where there 1st floor garage area had water - but that is not covered by flood insurance.

My son cannot afford >$14k in annual flood insurance premiums, nor do I think that coverage is a reasonable "value". He is unfortunatley part of the recent, FEMA flood map/ rates updates.

I am MOST interested in your noted option " Another alternative might be for you to buy an interest in his house" . We did provide them, with the initial downpayment, via TY 2012/13 gifts. We are surely ameniable to funding the exsting balance. I apologize for asking for more advise- as to how we might accomplish your suggestion.

Read the fine print in the flood insurance coverage. We spend part of the year in Colorado, which had very unusual devastating floods in September. Some of those very few property owners who do have flood insurance found out that it excludes below grade flood damage (e.g., basements, crawl spaces). One couple we know of (both attorneys) had their claim denied because 47 percent of the damage was below-grade. They read and understood the flood insurance policy when they bought the home but had no choice because the lender required it. Unless the home is on stilts or perhaps the whole building is swept away, flood insurance, even though it is a federal program offered through insurance companies, may not cover the damage. This information is available on the federal flood insurance program web site.

My thought was that instead of his borrowing the money from you, you just pay off the loan in exchange for getting an ownership percentage of the house reflecting your contribution as compared to your son's contribution. That way you don't have to worry about mortgage payments or figuring out minimum interest.

If you want him to pay you back, then a mortgage may be a good way to go. In the alternative he could buy you out a bit at a time as he goes along. The downside of that is that, while he won't be paying interest, if the value of the house goes up he will pay more due to that. If you do that you should have the house appraised at least annually, and have the amount he buys back based on those values.

another alternative is to loan the money and make a gift each year to reduce the amount of the loan.

Yes, that is something that is done sometimes. But when you do that the issue of imputed interest continues to be a problem. Either the parents have to recognize interest that the child would have paid, or the child has to recognize interest that is gifted by the parents.

I was assuming the interest would be paid per normal, but the principal would be wacked down by gifts.