Todd H. wrote:
Legbuh writes:
Hi all!
Here's the situation. My folks currently live up north (ND) in a
condo. They are close to retirement and have always wanted to move to
AZ. Well, they recently visited and found some properties they are
interested in.
Their condo is worth about 130k, and they owe about 20k on it. The
place they are making an offer on is about 160k.
They are asking me to help them with this, as a loan, to get between
the two. I told them they'd probably be better off getting a loan
from a bank, sell the condo, then pay off most of the loan.
Instead they want to loan money from me (100k or so) and then pay me
back when they sell the condo in ND.
They also have said they'd like to put the new place in AZ in mine and
a brother's name so when they die there isn't a lot of headache. I
don't know if this is the best idea either.
So, for these two situations what options are there? I can afford the
loan, but not sure if I want to put a large portion of my nest egg up
for this. Also, not sure about putting the new place in their kids'
name. I know this means we'd pay taxes on it, in the least.
So looking for any ideas.
You and your parents really need to talk with a tax advisor, and/or
someone savvy in inheritance planning (a lawyer savvy in wills and
trusts for instance). There's a lot to this stuff, and it's really
easy to set it up stupidly without professional guidance.
Now, assuming you aren't worried about your parents making good on the
loan, and assuming your brother isn't a shiester and you trust him,
the only things you should be concerned with all have to do with
taxes. The concerns to balance out with the ultimate plan:
Taxes are the least of their problems. If they put the new house in
the two sons names, what happens if one of the sons has an auto
accident, seriously injures someone and incurs a judgement for more
than the limits on their auto policy? Or suppose a son winds up in a
messy divorce and the wife claims she has a stake in the parents home
that her spouse owns.
The inheritance tax issues are minimal. There is no federal
inheritance tax unless the estate is over $1.5mil and it sure doesn't
sound like this estate is anywhere near that amount, or they wouldn't
need a mortgage from jr. The estate taxes in most states are very
modest, many have none at all, particularly for a small estate like it
sounds this one is. A simple check with the state tax website of
the state in question will uncover how much it is. In many states, the
amount depends on how close the person was to the deceased. For a
child and an estate of say $75K, it would not be unusual for it to be
zero. Bottom line, unless this estate amounts to something, wasting
money on lawyers, trusts, etc to avoid estate taxes is pointless. What
the parents do need is a good and properly executed will in the state
of residence. And a living will for the parents is appropriate too.
As for granting the parents a loan, that is entirely up to the son.
Since the parents asked him to help and they will be able to repay it
with the sale of the condo, I would probably do it, provided I had the
funds. I would make sure it's secured by a mortgage on their
existing condo. That way the son is protected in the event that the
parents incure some huge unexpected debt (see auto accident above, or
a sudden medical event, etc) If he does give them a loan, it should be
at rates equivalent to current market rates, otherwise the IRS may have
grounds to challenge that it is a legitimate and deductible (to
parents) loan.
o minimizing or elminating the hit with capital gains taxes on
the condo when it sells.
There should be no capital gains Capital gains on an owner occupied
residence is exempt from federal tax on up to a $500K gain for a
married couple. They do need to have lived in it as their primary
residence for 2 of the 5 years immediately preceeding the sale.
o minimizing how much the tax man benefits from your parents'
future passing that will be deducted from your inheritance.
Even if you don't feel you need any of that money, your
parents will want you two to have it vs the IRS if there's a
choice! There may be merit in your parents idea to put the
new home in both of your names, or in the names of an
irrevocable trust, or things like that. This can also have
benefits of streamlining things when they do pass, and
keeping the settlement of the estate out of public records,
yadda yadda. Your parents idea may very well have some
merit there. AARP magazine talks about stuff like this all
the time, btw.
Again, the is no federal tax on estates below $1.5mil. There are lots
of shysters out there advising people to do all kinds of crazy things,
for bizarre reasons, like the idea of avoiding public disclosure. Who
cares, unless this is some big mega estate? Thsi guy doesn't sound
like J Paul Getty. But look around and you'll find guys scaring
people and willing to take your money to set up all kinds of trusts you
don't need.
o ensuring that whomever is paying the mortgage is able to
deduct the mortgage interest to minimize their yearly income
taxes paid. But, if it's your retired parents paying, they
may not have much income to speak of, and may not need the
deduction.
The only one who can legally deduct the mortgage interest as an
itemized expense is the one who actually receives the mortgage and owns
the property, ie if the parents take out the mortgage, it is they who
must take the deduction. If JR pays it, it's not deductible by him,
unless it's really his house.
Then again, if you already have a home, you
can't get a deduction on a 2nd home...that type of stuff.
Wrong again. The mortgage interest and taxes are deductible on a
second home too.
and one final issue:
o Perhaps you're willing to lend money to your parents at a
rate that is a) greater than the interest rate you can get
at a bank right now, and b) lower than anything they can get
from a commercial lender. And that way you could both win.
Just be careful that the loan is not made much away from prevailing
market rates, or it can be challenged as not really a loan by the IRS.
But be sure to factor in that interest paid on a private
loan like this wouldn't be deductible like mortgage interest
is to a commercial lender... unless of course you the
borrower were to claim the interest as income on your
taxes. It can get complex. Hence the need for a tax
advisor's input here.
And wrong once again. It doesn't matter whether a mortgage is held by
an individual or a bank. There is no choice here. If the son grants
a mortgage, the interest he receives is 100% reportable as income, with
out regard to what the recipient of the mortgage does. And you'd have
to be an idiot to grant a mortgage that is recorded and not report the
income. Since the son has to report it as income, it would be quite
foolish for the parents not to deduct it, unless the std deduction were
greater.
Good luck!
Best Regards,
--
Todd H.
http://www.toddh.net/