Expert: Dick Dennis - 5/31/2008

Question
My mother is getting ready to downsize from our large family home to a
smaller, more manageable one.  My husband and I are interested in buying it
from her, but we are not in a position to afford it through a conventional
bank loan.  She would like to help us attain the house, however possible and
is talking with her accountant about the possibilities.   We have heard about a
Contract for Deed option, but have been told that it is not possible to do this
without her charging us interest.  Frankly, we can not afford the house if
there is interest charged.  She paid off the house earlier this year, and would
like to try to come up with a plan to sell us the house with little or no
interest.  Is that legal?  Is there a way to make a house affordable for family
members if the seller owns the house free and clear?

Answer
First of all, Beth, is there any other siblings in the picture? If there is, maybe they have interest in buying the property, too, and they could hire an attorney to protect their interests. If not, from where does your mother get her income? With you paying on the mortgage (you don't say in what state the property is located) I am assuming that'll be her only income other than maybe social security.

Now that I got all that out of the way, here is what can be done: You buy the property the regular way by your mother giving you a Warranty deed and you giving her a mortgage for regular monthly payments with a market interest rate. The Internal Revenue is going to assess your mother an interest rate and will bill her for that amount.

However, your mother may give up to $12,000 per person each year, that means $24,000 to you and your husband. So while you are making regular payments each month, at the end of the year your mother can forgive up to $24,000 each year until . . .  So it doesn't matter that you're paying her interest as the IRS requires.

But before you do that, I STRONGLY SUGGEST you consult with a tax attorney, CPA or tax expert to make sure you do this maneuver legally. I do wish you well.

Dick Dennis