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My dad is moving to Florida. He loves the house he has in New York. He wants it to stay in the family but I can't quite afford the mortgage yet. I have a wealthy cousin who said he'd hold the NY house for us for 2 years by purchasing my dad's house in Florida and have my dad just gift me the NY house. (Following?)

  • House is worth $430k and my dad purchased it 30+ years ago for $97k
  • My wife and I plan to live in the house for the next 10+ years

I have 2 years to be able to afford the mortgage and give my cousin/dad the money back. Here is my understanding:

  1. He files a 709 gift form (I understand $14k/yr $5.4M max)
  2. My dad then puts the title of the house in my name
  3. In two years, I take a mortgage out on the house for the full amount
  4. I give my cousin/dad $430k from the mortgage
  5. Live happily ever after

Questions:

  • Where are the tax warnings in all of this?
  • Is it true that I don't pay capital gains if I lived in the house for 2+ years and sell it for more than the $430k?
  • Will a bank be willing to take out a mortgage on a house that I technically own for the full amount?
  • What do I need a lawyer to do?

Edits to answer questions:

Why doesn't he just buy the NY house and rent it to you?

Insurance would go up for me if I couldn't get the multi-line discount. The taxes would be in HIS name and property taxes would go up. He also doesn't want to be bothered by collecting rent.

Are you and your dad married?

Both my dad and I are married... to wives, not each other.

Can your dad sell it to you for what you can afford, or does he need the full $430k to buy the FL house (hence the cousin's involvement)?

He needs the full amount for the home in Florda.

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    @TTT I would LOVE this house... just want to make a smart decision financially. – Phil Jul 6 '17 at 19:31
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    Note your basis in the home is $97K if it's gifted, not $430K. – TTT Jul 6 '17 at 19:45
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    What does your cousin get out of this arrangement? He just buys a Florida house and your dad lives there rent-free? Why doesn't he just buy the NY house and rent it to you? – D Stanley Jul 6 '17 at 19:48
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    Your proposed way of working seems remarkably complicated. That level of complication needs legal advice / a contract between you, your father, and your cousin. Otherwise, if things go wrong, someone will be out of a house, possibly both you and your father. – Peter K. Jul 6 '17 at 20:02
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    @Phil And what we're saying is that there's a lot more to consider than just gift tax. Convoluting the ownership, mortgage, and residency like this can backfire in many ways that aren't intended. All parties need to be protected from unanticipated events like divorce, bankruptcy, disability, etc. – D Stanley Jul 6 '17 at 20:14
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I understand $14k/yr $5.4M max

This isn't the right way to say it. Your dad has a $5.4 million estate tax exclusion that can be used for gift tax. In addition to that (not instead or as part of), he and his wife each have a $14k/year gift tax exclusion. So if you aren't paying for two years from today, you actually have three years of gift tax exclusion: 2017; 2018; 2019. So that's 3 * 2 * $14k = $84k that he (and his wife) can give you without using any of the estate tax exclusion. But

I give my cousin/dad $430k from the mortgage

According to this, you don't want your dad to give you any money. You want to pay the entire $430k. In that case, don't file gift tax forms. He's not giving you money. He's loaning you money.

I agree with the others. The cleanest solution is for your cousin to loan you money to buy the house from your dad. Pay a lawyer (or have your cousin/dad do it) so that it's legally written as a mortgage and you can get your interest deduction. You start paying off the loan in two years. Until then, interest accrues. So instead of a $430k debt, you'd owe something like $470k. Maybe more if your cousin pays the property taxes as well.

Your cousin is out $430k plus possibly property taxes, but apparently he can afford that. You have a house and a mortgage. Your dad has money to buy his Florida house.

Note that if your dad wanted to give you money, he could. He could collect $346k from you (borrowed from your cousin) and give you $28k equity immediately and then two more payments in 2018 and 2019. But that assumes that $346k is enough for him to buy his Florida house. If not, just do the mortgage. He can give you money by check which you can send to your cousin if he wants to do that.

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    The spouse could also receive annual gifts in the same amount from each parent, doubling the total to $168k. – Hart CO Jul 7 '17 at 1:47
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    Just got off a call with my cousin; we're going to do it this way (loaning the money as a mortgage). Incredible how a single thread can change how my next two years just went down. Thank you all so much! – Phil Jul 7 '17 at 2:21
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I think the cleanest way to do this is to rent the house from your father for 2 years, possibly adding an option to buy at a set price to the lease agreement. That takes care of any gift issues, and avoids complications like you living in a house that you couldn't afford to own otherwise. If/when you are able to afford a mortgage, get a mortgage on the house and buy it from your father.

Will a bank be willing to take out a mortgage on a house that I technically own for the full amount?

I would not take out a mortgage for anything more than 80% of the house's market value. Anything more than that, and you need to pay mortgage insurance, which will increase your monthly payment for no benefit to you.

My biggest concern is that you won't be able to afford an 80% mortgage after 2 years. If your father really wants to keep the house in the family then he should either keep the house and rent it to you, or give you the down payment as a gift (keeping under the maximum gift to avoid taxes). If neither you or your father cannot afford the house you may have no choice but to sell it. I would not advise you make a bad financial decision purely for sentimental reasons.

  • @chepner Yes - fixed. – D Stanley Jul 6 '17 at 19:48
  • Thanks for the answer, but this is not a path that we want to go - if we can't afford the house, we sell it and everything is back to what it was. – Phil Jul 6 '17 at 19:55
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tldr; Is the purpose of doing this to ultimately avoid any sort of capital gains paid by someone in your family? Your plan accomplishes this if your dad is single and you are married, but if your dad is married this is probably unnecessary.

One side effect of this plan is both you and your dad are unnecessarily giving up a portion of your lifetime gift tax exclusion. Your dad is giving up somewhere between 97-56= $41K of his exclusion (if both you and he are married) and 97-14= $85K (if neither you or your dad is married) and when you give the $430K back you are giving up to that amount minus somewhere between 14-56K. If your dad is married and you were to simply purchase the home from your dad for $430K you would both avoid dipping into your lifetime max, and your dad wouldn't realize any capital gains. If he isn't married, but you are, then your plan works in avoiding any capital gains paid by anyone in your family, unless you end up selling the home in the future for more than $597K.

The plan also hinges on:

  1. You and your wife will not be gifting or passing on more than $11M to your heirs
  2. The law won't be changed to lower the maximum exclusion in your lifetime
  3. You can obtain a cash-out refi at a reasonable interest rate for the amount of money you'll need, at the time in the future that you need it.
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    I'm thinking it would be smarter to have my cousin loan me the money... and for me to just buy the house out right and avoid any inclusion with my dad at all. – Phil Jul 6 '17 at 20:59
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    @Phil - I agree. You'd probably get a better interest rate and less hassle with your cousin compared to a bank. Just make sure the interest you pay your cousin is still tax deductible. The lawyer should be able to draw up the contract between your cousin and you such that the loan is secured and meets the requirements for the tax deduction. – TTT Jul 6 '17 at 21:20
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Ok, have your father 'sell' you the house with a RECORDED land contract for x dollars and a gift of equity(GOE) of y. He writes of the max he can each year for the GOE (ask a tax attorney on this one), and your cousin lends him the money for his FL prop. Consult a tax attorney on the capital gains, but you can write off the actualized gains at sale if you LIVED in the prop for 2 of the last 5 or 7 years (I can't remember) and were on title.

Years later, you use the recorded land contract, with the verifiable on time payments you've been making, to a conforming lender and do a R&T refi.

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An issue with the initial plan was that the house was gifted to you. Therefore you owned it. Now two years later you wanted to get a mortgage. The IRS would look at it as a home equity debt not a home Acquisition debt, and the interest on the first $100,000 of home equity dept is deductible.

This is from IRS pub 936

Mortgage treated as used to buy, build, or improve home. A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

  1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1 later.)

  2. You build or improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

  3. You build or improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2 later.)

Example 1.

You bought your main home on June 3 for $175,000. You paid for the home with cash you got from the sale of your old home. On July 15, you took out a mortgage of $150,000 secured by your main home. You used the $150,000 to invest in stocks. You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost.

At two years you would be way outside the 90 day limit.

The pub also gives example on how calculate the amount of interest you can deduct.

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