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(State of Oklahoma, USA)

Someone I know sold a house and held the mortgage personally. The buyers paid promptly for several years, but then developed several medical problems and are all on disability, not sufficient to afford the payments. The seller wants to give it to them and forget about it.

They asked me to find a form for them to have recorded. All the ones I have found explicitly state "paid in full" so there is a concern that one of their heirs (they are over 80 and one has dementia) might sue the buyers.

No doubt some are thinking the medical problems are a fiction to avoid collection, but they don't think so. Since the buyers paid promptly for a few years at first and since the sellers have visited them at the house, I don't think so either. However, just in case, I would feel better if there were also language preventing the buyers from suing the seller for damage that has occurred since the sale, that the buyers could not afford to repair.

The sellers don't want to pay a lawyer for it. Anyone know (1) whether the words "paid in full" are a risk to the buyer(s) when it can easily be proven false? and (2) a source for a release that is free or sample (or extremely low-cost) and has language to indemnify the seller(s) from any further obligation (including taxes)?

Also, as Ganesh hinted, taxes on the unpaid balance could result in the government giving the recipients more problems on top of the medical issues. Hmm, I'm tempted to call a lawyer and pay him myself to prepare something.

Update: Can the seller claim the amount not collected as a bad debt deduction?

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    Your question is more legal that financial, and may get better answers on law.stackexchange.com. However, debt forgiveness for a primary residence might not be taxable. – D Stanley May 1 '17 at 2:07
  • I think the degree of legal certainty that the sellers desire (i.e., not possible for X to sue Y later) is not compatible with the desire to not pay a lawyer. If you want to make sure the legal situation is squared away you need a lawyer to do that. – BrenBarn May 2 '17 at 4:10
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Have your friend sign a quit claim deed with the amount paid to date as the value in consideration. If the value of the property is greater than what they have paid, the rest can be considered a gift.

There is a $14,000 gift tax exclusion per year which will allow your friend to give that much without counting against the estate tax limit. If your friend's estate is under $5.5 million (single) or $11 million (married) then there's no reason to worry about exceeding the gift tax exclusion.

If the property is gifted as is, there should be no legal recourse to the heirs or the receivers of the property if they are not satisfied with the gift in any way.

  • The giver gets taxed ?!? We were trying to avoid the buyer from being taxed to death since they are already incapable of paying. For the seller to be taxed more for taking less is absurd! Unpaid balance is over $30K But I highly doubt their net worth exceeds $100K – WGroleau May 1 '17 at 19:46
  • @WGroleau Is the "friend" on the deed? I was assuming the property was deeded fully over but the seller had a lien (mortgage) on the property. – D Stanley May 1 '17 at 20:41
  • @WGroleau Forgiveness of a debt is a taxable event, yes: turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/… It seems absurd at first, but this is all heavily influenced by attempts to stop very crafty people from trivially evading taxes (giving "loans" and forgiving them later was a common trick). Note that being financially destitute being the reason for the debt relief can mean something to the IRS, but that doesn't mean this is trivial or automatic. – BrianH May 1 '17 at 21:05
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    @BrianHall - There are plenty of rich people who give loans and then gift the interest because it falls below the $14,000 limit. There's no reason it can't be a gift within the limits of the gift tax framework as outlined in my answer. – Nathan L May 1 '17 at 21:41
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    The $14,000 limit is per person. So $14,000 each for husband and wife, and if he is married, that's also $14,000 each from his wife to husband and wife. So that's $56,000/year possibly, and over the next few years, that may cover it pretty quickly. Whether it is seen as a gift or debt forgiveness is entirely up to you friend. He could gift money which they use to repay the debt completely legally. I see nothing murky here. – Nathan L May 1 '17 at 23:16

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