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My family member has a $37,000 Certificate of Deposit that matures in December. She had planned to buy a house in January and use this money as part of her down payment.

Recently she has an opportunity to exit her current apartment lease early and has found a house she would like to buy. But some of her money is tied up in the CD.

I am happy to help bridge the gap for her. But I’m not sure of the best way to do it.

  1. I could gift her $37,000 and ask her to pay it back later. But that exceeds gift limits and also seems “wrong” as it isn’t a gift.

  2. I could loan her $37,000 with some kind of formal agreement. I’m not sure of the tax implications of this (and I’m not sure if her lender would have a problem with this but I can ask.)

  3. I assume I could “buy” her CD from her for its current value. Not sure if this is possible.

Is there a right way to go about this? Bonus points for the most tax-advantageous method (that isn’t skeezy).

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    Presumably the $37K is the original amount deposited and thus the CD has increased in value due to quarterly (or monthly?) interest payments since the date of creation. If your family member simply cashes in the CD early, there will be a penalty which might be interest accrued since the last interest payment but not yet paid into the CD, or maybe one month or one quarter's interest etc. If this is acceptable to the family member, you could just stay out of the whole matter. Jun 27, 2023 at 3:36
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    @gwcoffey Early withdrawal penalties on a 1-year CD typically range from 3-6 months of interest. With 1-year CD rates in the low single digits, I'd expect the penalty to be in the range of a few hundred dollars, which might well be worth it to simplify the situation and avoid debt between family. Jun 27, 2023 at 15:50
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    I assume you are American, and we are talking about the US, but it would still be nice to dismiss all doubts by tagging the questions with the united-states tag. Jun 28, 2023 at 7:05
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    A CD to me is a Compact Disc. What does it mean in the context of (presumably American) finance? Jun 28, 2023 at 10:17
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    @ChrisMelville If you're going to peruse a financial website, don't expect others to cater to the lowest common denominator. Googling "financial CD" in your favorite (presumably non-American) search engine would have taken less time than your comment for such a non-esoteric acronym.
    – MonkeyZeus
    Jun 28, 2023 at 13:43

2 Answers 2

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I will first look at your three scenarios:

I could gift her $37,000 and ask her to pay it back later. But that exceeds gift limits and also seems “wrong” as it isn’t a gift.

The lender will notice the $37,000 deposit into her bank account, and want an explanation. If the story is that it is a gift, they will require you to sign a form stating that it is a gift and it doesn't have to be repaid. Swearing it is a gift when it isn't is loan fraud.

Yes it exceeds the annual gift limit. But that means the excess amount comes off your lifetime limit, and that limit is in the millions. There will be paperwork for the IRS.

I could loan her $37,000 with some kind of formal agreement. I’m not sure of the tax implications of this (and I’m not sure if her lender would have a problem with this but I can ask.)

If you collect interest, and you should, it will be taxable income for you. The lender will want to know what the monthly payment will be. The obligated monthly payment will be factored into her ability to afford all her required payments. If they accept the plan that the CD when it matures will retire the loan, the harm may be minor. But the question is will they believe it. Or will they wonder if the loan will continue for years because the CD will be rolled over.

I assume I could “buy” her CD from her for its current value. Not sure if this is possible.

I do not know if this is possible. I know in theory it is, but I have no idea if in this specific case this can be done.

There is a 4th possibility.

Cash the CD is in early. There is a cost to this. The paperwork connected to the CD will define the early withdraw penalty. Generally it is stated as days or months of interest. Depending on when the CD was purchased, and the size of the penalty it can mean that the amount returned will be less then the purchase price. For example if there is a 90 day penalty, but you cash in after 30 days.

The fine print needs to be studied. The calculation needs to be made.

The CD doesn't need to be cashed in until just a few days before settlement. That means it might collect a month or two more interest before it must be cashed in.

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    This^ Cash the CD in early, the penalties are not significant and it removes the risk of you being out some or all of the 37K and ruining the relationship with this person/family.
    – Pete B.
    Jun 27, 2023 at 14:10
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    What if i don't want to collect interest nor get a monthly payment?
    – bracco23
    Jun 27, 2023 at 16:08
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    treating the loan as a real loan with paperwork, payments, and interest will make it real and it may prevent your family member from trying to extend the loan another year. Jun 27, 2023 at 16:14
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    @bracco23 - If you don't collect interest, the IRS will tax you on the imputed interest at the applicable federal rate. That would be 4.8% currently (it changes monthly) assuming a short-term loan. irs.gov/pub/irs-drop/rr-23-12.pdf Jun 27, 2023 at 18:58
  • +1 to cash in the CD. KISS rules the day!
    – RonJohn
    Jun 28, 2023 at 16:01
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Recently she has an opportunity to exit her current apartment lease early and has found a house she would like to buy.

Simple, don't exit the apartment lease or she can cash in the CD early.

She nor you are prepared for the clusterf*** known as the housing market. Expect to pay 10-30% over asking price and possibly in cash.

Realistically, she can comfortably leave the CD where it is until she has an accepted offer; until that time it's just an exercise in futility.

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    "Expect to pay 10-30% over asking price and possibly in cash." Not currently the case in my market, which is a top 10 growing city in the USA the last few years. Actually, houses are starting to lower asking prices to entice offers. It's a "buyer's market".
    – user26460
    Jun 28, 2023 at 15:32
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    @user26460 Right, your mileage may vary.
    – MonkeyZeus
    Jun 28, 2023 at 15:39
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    Such a classic stack overflow answer. Question: "How do I best do X?", Answer: "You should not do X."
    – Brady Gilg
    Jun 30, 2023 at 17:32

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