AboutHelen P. O`Planick, EA Expertise I am a tax professional, with experience in individual taxation. I would prefer not to answer questions about non-resident aliens or corporate taxation. Please do not ask me state related questions, unless the state is Pennsylvania. There are 42 taxing states and 42 TOTALLY different sets of state tax law.
Experience I have been preparing tax returns almost all my life. I have been in professional practice for 25 years and I am enrolled to practice before the Internal Revenue Service.
Organizations National Association of Enrolled Agents
Publications I am a prior Money Magazine Tax Test taker and have been quoted extensively in all media including monthly periodicals and books by tax authorities.
Expert: Helen P. O`Planick, EA Date: 7/21/2008 Subject: Which situation would cause less to be paid in tax?
Question Hi Helen,
I am in need of some pretty good advice... I will try to make as much sense as possible, but please forgive me for an occasional run on sentence or two. Here is my situation:
My father-in-law is offering to sell my husband and I one of his properties, as he needs to pay off his mortgage on his personal residence and also remodel it. The house he is going to sell us is a 10 acre parcel with a 3 bdrm 2 bath house, 2 car garage, pump house and barn. It was appraised at $470,400 previously, but in 2008 it was appraised at only $447,000 (bad housing market).
My husband and I are, naturally, ecstatic about this situation as we would not normally be able to afford such a piece of property (we have 4 children). We have been pre-qualified for a $268,000 3/1 Adjustable Rate Mortgage and the mortgage broker proposed that my father-in-law give us the 20 down payment using a "gift of equity". This brings up concerns about how much my father-in-law would have to pay in capital gains tax. He has been struggling financially and the most important thing is for him to come out ahead in this situation (I don't see how we couldn't come out ahead in any way). I know that he could gift both my husband and I up to $12,000 without taking away from his $1,000,000 lifetime gifting limit, but since we have 4 kids, could his "gift of equity" of $68,000 do the same?
The mortgage broker suggested the sales price as $335,000 and then a "gift of equity" for 20% of that price which is $68,000 (that would put the amount of our loan at $268,000). My father in law owes about $160,000 on the property so that would give him about $100,000 after the sale is completed. I know his purchase price on the home was $225,000. He has never lived in this house and has used it as a rental home.
Another option we were thinking we could try is to assume his home loan and then open a HELOC to get him money to pay things off? (and then after a year we would want to refinance). If we did assume his loan would he also lose out on any tax benefits that he might get from selling the house? Another option would be to get a 2nd mortgage for the other $130,000 he would need to pay off his primary residence and also renovate it... is that even legal?
I'm just not clear as to what the best options are at this point because I do not know what my father-in-law's tax situation would be. I'm trying to be creative, but I don't want to do anything illegal or that would not be cost effective for my father-in-law come tax time.
I realize there may be a lot of information here that you do not need, but my main question is how can we do this without my father-in-law having to pay a lot in tax, and getting him the money he needs? If you have any advice you can give me, I would appreciate it very much!
Answer The kids cannot be given a gift of equity. However, dad will have to file a gift tax return, BUT not pay gift tax unless he has already given 1 million in gifts.
I have no idea what his taxable gain would be, it depends on the depreciation allowed or allowable, so I really can't answer any more of the question. I would suggest Dad's tax professional get involved for further questions as he/she knows Dad's situation better then anyone.
