Floating Doc (Forum Supporter)
Floating Doc (Forum Supporter) UberDork
9/9/20 5:45 p.m.

Here's the situation. Wife's brother in law owns our home. We are going to buy the house from him.

The value of the house is about $190k, he has indicated that he would take $100k. We're looking at different options for the down payment. If we make a 20% down payment the bank won't hold escrow for the taxes and insurance, which we would like to avoid.

To get the 20% down payment, I would need to borrow from my 401k, which I would like to avoid.

One option that has been presented to us is to have the contract state that he will give us a "gift of equity" (GOI) which would count as a down payment. Where it get complicated is dealing with the tax implications to the BIL. If he does the GOI and says that his gift is $20,000, he won't have a tax implication (the IRS sets a $30,000 ceiling before taxes kick in). However, if the amount of the GOI is set according to the appraised value of the home, his gift to us becomes much more, and he has a tax hit.

Does anyone know if the amount of the GOI is set according to the appraised value of the house, or is it possible to specify the amount?

John Welsh (Moderate Supporter)
John Welsh (Moderate Supporter) Mod Squad
9/9/20 6:19 p.m.

Buy this $190k house for $100k.  You should be able to buy this with really no money down since the borrowed amount is about 55% of the appraised value. 

If you put another 20% down then the mortgage would only be for about 35% of the appraised value. 

If it were me, I would just accept the escrowed insurance and taxes.  Get the deal done and later refi the whole thing the way you really want it. 

PS:  sorry, this response does not answer your true question about GOI. 

RX Reven'
RX Reven' SuperDork
9/9/20 6:28 p.m.

In reply to John Welsh (Moderate Supporter) :

I think the Floating Doc is trying to avoid what amounts to a gift tax.  The last time I checked, the limit was 12K...although that can be boosted to 48K if the current owners are joint tenants and they each gift Mr. & Mrs. Floating Doc. 12K.  I live in California but a quick check indicates that property taxes in Florida average about 1% and that gets excused, in some cases, when at least one owner reaches 65 years of age.  My point is that what the rest of the world sees (100K Vs 190K) is going to impact several things such as property tax.  

codrus (Forum Supporter)
codrus (Forum Supporter) UberDork
9/9/20 7:22 p.m.

Do you have a CPA?  I would definitely check with one about this.  If he sells it to you for substantially below market rate then it's conceivable that the IRS would view the difference as a gift and charge HIM gift tax on that amount.  (Or at least take it out of his lifetime gift tax exemption, which still requires he put it down on a form).

 

RX Reven'
RX Reven' SuperDork
9/9/20 7:39 p.m.

In reply to codrus (Forum Supporter) :

Pretty much what I said so I doubt you'll be surprised to learn that I agree.cheeky

Anyway, my parents wanted to give my wife and I a zero interest loan on a property we were buying out of the family estate.  The CPA informed us that there are limitations not just how high of interest can be charged but also on how low of interest can be charged.  Our workaround was to do the old 4 X 12K (dad + mom each give son + wife 12K = 48K) gift maneuver.  We just gifted back 4.8K per year for ten years to effectively achieve a ten year, zero interest loan on 48K.    

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
9/9/20 8:06 p.m.

Ask if you can buy the house for $125K, with $25K cashback at signing from the seller. That means that you're buying the house for $125k, with $25k down. You're getting the $25k from the seller... and immediately giving it back to the seller. 


EDIT: May have to be $24k to avoid gift tax? Not sure. 

Floating Doc (Forum Supporter)
Floating Doc (Forum Supporter) UberDork
9/9/20 8:23 p.m.
mtn (Forum Supporter) said:

Ask if you can buy the house for $125K, with $25K cashback at signing from the seller. That means that you're buying the house for $125k, with $25k down. You're getting the $25k from the seller... and immediately giving it back to the seller. 


EDIT: May have to be $24k to avoid gift tax? Not sure. 

Creative idea, but it's the bank requiring the down payment, not the seller.

Robbie (Forum Supporter)
Robbie (Forum Supporter) MegaDork
9/9/20 8:54 p.m.
Floating Doc (Forum Supporter) said:
mtn (Forum Supporter) said:

Ask if you can buy the house for $125K, with $25K cashback at signing from the seller. That means that you're buying the house for $125k, with $25k down. You're getting the $25k from the seller... and immediately giving it back to the seller. 


EDIT: May have to be $24k to avoid gift tax? Not sure. 

Creative idea, but it's the bank requiring the down payment, not the seller.

I think you might want to read that again, the bank would get their 25k down...

However, IIRC, the regulatory changes made after 08-09 made it a lot harder to roll the down payment of the mortgage into the mortgage with tricks like this.

People also would get a personal loan from the same bank for the down payment, and then get a mortgage for a larger amount than the house sale so when the closing happened they paid off their personal loan but were also immediately underwater.

Purple Frog (Forum Supporter)
Purple Frog (Forum Supporter) Reader
9/9/20 9:58 p.m.

I think i got lost.  If the appraised value is $190K  and you only want to borrow $100K from the bank, no down payment will be needed.  Your down payment is the $90k in value you didn't need to borrow (well over 20%).  What am I missing?

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
9/9/20 9:59 p.m.

Robbie, not sure on that. We did it in 2016, although it was admittedly only 1-2% of the sale price instead of 20%, but I would figure that as long as it is still only half of the appraisal they wouldn’t care too much. 

codrus (Forum Supporter)
codrus (Forum Supporter) UberDork
9/9/20 10:35 p.m.

FWIW, the annual gift tax exclusion changes, it's $15K right now (was $12K in 2008).  So a couple to another couple is $60K.

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

I do recommend talking to a CPA rather than just random yahoos on the Internet though. :)

 

Floating Doc (Forum Supporter)
Floating Doc (Forum Supporter) UberDork
9/10/20 5:51 a.m.

In reply to codrus (Forum Supporter) :

Yeah, CPA discussion is definitely going to happen. 

90BuickCentury
90BuickCentury Reader
9/10/20 5:57 a.m.

I would think one could state the sales price as 125k with gift of equity of 25k. That should make the sale price 125k, so as long as house appraised at 125k or higher, I wouldn't see there being any issue. If reason that he picked 100k as sales price is to avoid showing a "profit" on the sale, selling it at 125k may make him need to show a taxable profit of 25k which could cause him to pay an additional $2,500 to $10,000 in taxes. I am not a lawyer, realtor, or CPA etc.

FSP_ZX2
FSP_ZX2 SuperDork
9/10/20 7:09 a.m.

In reply to Floating Doc (Forum Supporter) :

The gift of equity should be based on the the agreed numbers--not the appraised value.  If it appraises for more--all the better for you down the line.

That said...if you can buy it for $100K and it's worth 190K, I would take the money from the 401K, buy it outright with that downpayment and then turn around and do a cashout refinance to anything less than 80% LTV (of the $190K -  up to $152K), repay the 401K and use any excess proceeds to cover remodeling, improvements etc.  That avoids any tax implications and gives you the ability to pay yourself back--and then some.

 

Andy Neuman
Andy Neuman SuperDork
9/10/20 7:27 a.m.
Floating Doc (Forum Supporter) said:

In reply to codrus (Forum Supporter) :

Yeah, CPA discussion is definitely going to happen. 

This or talk to a mortgage specialist. When I bought my new to me house they gave me 4-5 options on how to get a second mortgage before selling my old house. Some strategies are better than others but it really can let you see your actual options. I was surprised when I had 75% equity in the old house they still wanted their 20% down on the new house. 

Talking to the mortgage person will also help give you the direction you need.

 

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