Tax or legal implications for repaying a relative a large amount?
February 11, 2017 2:02 PM Subscribe
Person A is going to buy a home in cash for his relative, Person B. Person B plans on paying Person A back over the next few years through monthly payments as well as an initial payment that would cover 20% of the total. These would be made via money transfer from B's to A's bank account. Both are US citizens and live in the US, and have the same bank.
Are there any tax or legal implications for such a scenario? If so, is there a maximum amount person B should pay person A per month or year? Or is there a better way to go about this? Any resources to read up on this matter?
Are there any tax or legal implications for such a scenario? If so, is there a maximum amount person B should pay person A per month or year? Or is there a better way to go about this? Any resources to read up on this matter?
It's not clear from the question, but is Person A going to hold the mortgage for Person B, or is Person A just "loaning" Person B money? Is there interest involved? Who will be responsible for paying property taxes, and whose name will be on the title?
Seconding the real estate lawyer.
posted by thomas j wise at 2:16 PM on February 11, 2017 [1 favorite]
Seconding the real estate lawyer.
posted by thomas j wise at 2:16 PM on February 11, 2017 [1 favorite]
The way to do this is through a lawyer with an actual recorded mortgage, whether they are relatives or not. So the steps are:
-- Person A buys the house for cash (no tax consequences except possibly for the seller)
-- Person B buys the house from person A, with a 20% down payment and a mortgage for the rest.
-- Person B makes mortgage payments over time to person A in accordance with the mortgage. Only the interest portion of these payments would be taxable income to Person A. If it is a zero-interest mortgage, the IRS requires tax to paid paid on the imputed interest. See tables here to determine the correct imputed interest rate. (Note also: that outfit, National Family Mortgage, might be a resource for managing this loan situation.)
-- When the mortgage is paid off, Person B owns the house.
posted by beagle at 2:20 PM on February 11, 2017 [4 favorites]
-- Person A buys the house for cash (no tax consequences except possibly for the seller)
-- Person B buys the house from person A, with a 20% down payment and a mortgage for the rest.
-- Person B makes mortgage payments over time to person A in accordance with the mortgage. Only the interest portion of these payments would be taxable income to Person A. If it is a zero-interest mortgage, the IRS requires tax to paid paid on the imputed interest. See tables here to determine the correct imputed interest rate. (Note also: that outfit, National Family Mortgage, might be a resource for managing this loan situation.)
-- When the mortgage is paid off, Person B owns the house.
posted by beagle at 2:20 PM on February 11, 2017 [4 favorites]
Don't sell the house twice - it'll incur twice the closing costs.
Do it as an asset-backed loan.
When it's not done as a favor among family members, it's called a hard money loan, with higher interest rates than regular mortgages. There are standard documents for this that safeguard both family members.
You could either ask a real estate lawyer to prepare the documents, or find a local private mortgate broker, present the situation, and see if they will take a broker fee in return for preparing the documents, or take a percentage for handling the whole thing.
posted by metaseeker at 2:53 PM on February 11, 2017 [1 favorite]
Do it as an asset-backed loan.
When it's not done as a favor among family members, it's called a hard money loan, with higher interest rates than regular mortgages. There are standard documents for this that safeguard both family members.
You could either ask a real estate lawyer to prepare the documents, or find a local private mortgate broker, present the situation, and see if they will take a broker fee in return for preparing the documents, or take a percentage for handling the whole thing.
posted by metaseeker at 2:53 PM on February 11, 2017 [1 favorite]
Best answer: I've found the answer to my own question.. There is a $14,000 annual limit in the US where neither party will be taxed.
posted by cokelessrome at 11:10 PM on February 11, 2017
posted by cokelessrome at 11:10 PM on February 11, 2017
That's the amount that can be gifted. Loans are not gifts. Also they're one to one so if either party is married then you can increase that amount by 14k per person to 56k (gifter and gifter spouse both give 14 k to receiver - and receiver spouse)
posted by bitdamaged at 11:19 PM on February 11, 2017
posted by bitdamaged at 11:19 PM on February 11, 2017
The annual tax free gift limit is not the answer to the question you asked here, because your question is about a transaction between two people where one of them pays the other in exchange for a house.
posted by the agents of KAOS at 11:26 PM on February 11, 2017 [2 favorites]
posted by the agents of KAOS at 11:26 PM on February 11, 2017 [2 favorites]
Response by poster: Is it necessary to have it be a loan on paper or illegal in some way to not do so? Obviously both parties want to avoid paying fees for essentially sharing money with family but would not do so if that was something that could cause trouble.
posted by cokelessrome at 11:33 PM on February 11, 2017
posted by cokelessrome at 11:33 PM on February 11, 2017
Best answer: There should really be a signed mortgage document spelling out terms. Stuff happens. You can download one from the internet or MeMail me for one. You don't have to file it with anyone. This is to protect your family relationship in case of the unexpected - job loss, property value drop, natural disaster, etc.
If there's a chance the borrower could get flaky, you could also create a Trust that owns the house. Potential future marriage and/or divorce are also a consideration if there's a desire to keep the assets within the immediate family.
Note that in the U.S, you can take a tax deduction for mortgate interest on your primary residence. If you're doing this as an informal loan, then obviously you shouldn't take the tax deduction.
The part of this transaction that becomes public record is the property deed. Whoever's name is on the deed will have to declare it in financial disclosures, for example for college financial aid applications or in case of medical bankruptcy.
posted by metaseeker at 12:52 AM on February 12, 2017
If there's a chance the borrower could get flaky, you could also create a Trust that owns the house. Potential future marriage and/or divorce are also a consideration if there's a desire to keep the assets within the immediate family.
Note that in the U.S, you can take a tax deduction for mortgate interest on your primary residence. If you're doing this as an informal loan, then obviously you shouldn't take the tax deduction.
The part of this transaction that becomes public record is the property deed. Whoever's name is on the deed will have to declare it in financial disclosures, for example for college financial aid applications or in case of medical bankruptcy.
posted by metaseeker at 12:52 AM on February 12, 2017
If the amounts are large then at some point you will either have to create a properly constructed way of transferring the money or property, pay gift tax, or "invent" a clever structure that will be instantly recognizable to the IRS as a gift tax evasion scheme. At this point it's hard to know if it's more advantageous to do you propose, or to create a way to get the money to you now so that you start out with a deed in your name. It's very dependent on specific circumstances.
The regulations are thorny enough that it's worth a couple hours of lawyer time to end up with a transfer structure that has legal precedent behind it. Any decent estate lawyer in your jurisdiction ought to be able to generate this in the time it takes you to explain your specific situation, because unless you're super unique they're going to be pulling out Boilerplate Agreement X from their archive.
posted by range at 5:16 AM on February 12, 2017
The regulations are thorny enough that it's worth a couple hours of lawyer time to end up with a transfer structure that has legal precedent behind it. Any decent estate lawyer in your jurisdiction ought to be able to generate this in the time it takes you to explain your specific situation, because unless you're super unique they're going to be pulling out Boilerplate Agreement X from their archive.
posted by range at 5:16 AM on February 12, 2017
>I've found the answer to my own question.. There is a $14,000 annual limit in the US where neither party will be taxed.
Let's be clear as to what's happening: Unless your gifting party has given over $5.5 million over his or her lifetime, there still no "taxes" at this point. You're basically allowed to gift $14,000 a year without having to report it by filing a "gift tax form" - any amount over $14,000 is deducted from the $5.5 million lifetime exclusion. However, no gift taxes are incurred until you go over the lifetime exclusion.
That being said, I agree with others in that you're discussing a intra-family loan, not a gift.
One main benefit of doing this correctly and legally on paper is that the Person B will then be able to take the mortgage interest deduction on their taxes (assuming interest is being charged by person A). But I agree with the others - you present a lot of potentially expensive problems down the line if something goes wrong - if Person B passes away before the loan is paid back, Person A would have an extremely hard (and expensive) time proving that they have rights to the underlying asset.
posted by Karaage at 5:18 AM on February 12, 2017
Let's be clear as to what's happening: Unless your gifting party has given over $5.5 million over his or her lifetime, there still no "taxes" at this point. You're basically allowed to gift $14,000 a year without having to report it by filing a "gift tax form" - any amount over $14,000 is deducted from the $5.5 million lifetime exclusion. However, no gift taxes are incurred until you go over the lifetime exclusion.
That being said, I agree with others in that you're discussing a intra-family loan, not a gift.
One main benefit of doing this correctly and legally on paper is that the Person B will then be able to take the mortgage interest deduction on their taxes (assuming interest is being charged by person A). But I agree with the others - you present a lot of potentially expensive problems down the line if something goes wrong - if Person B passes away before the loan is paid back, Person A would have an extremely hard (and expensive) time proving that they have rights to the underlying asset.
posted by Karaage at 5:18 AM on February 12, 2017
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posted by rockindata at 2:12 PM on February 11, 2017 [4 favorites]