My wife and I are looking for our first BRRRR deal right now and we are planning to partner with my parents as our "private investors." We are looking to submit an all cash offer tomorrow, but we are unsure how to navigate getting the cash from my parents into our account and showing a proof of funds in a legitimate way from a tax perspective.
Looking for advice on how we should work through this.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
POF has nothing to do with taxes, just explain your situation and show POF for your account and theirs, don't worry about the transfer until after you are in escrow.
@Aaron K. Thanks for the reply. I probably didn't have the verbiage right. My main question is around the Private Loan with my parents. Do we need to draft up a loan agreement, both sign off on it and have it be notarized? As you mention, wait on this until escrow. We would be paying them interest.
I am trying to make sure I understand this all properly. Mainly looking for piece of mind for my dad. He is concerned about having the loan mistaken as a gift and then running into tax implications down the line for their them or us.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y
For the actual act of borrowing....your title company should have standard Promissory Note and Mortgage documents....these should be executed and the mtg recorded.
Accountant · Rochester, NY · Member since 2017 · 36 posts · 20 votes
6y
Hi @Benjamin Nitz, from a tax perspective, you would want something in writing. In order for the loan to not be classified as a "gift" you'll need similar terms to a normal loan. Typically a payoff period with a normal market interest rate -- I believe the IRS states the specific loan interest you'd need to charge (but I could be mistaken, this is just off the top of my head).
Either way, there is some validity to your dad's concern. Without a proper loan, with interest, in place, the IRS could come in and deem this a loan. Now, that's not the worst scenario. He'd have to file Form 709, but the gift exemption level right now is substantial. So there's a good chance he'd never run into gift tax unless he is extremely wealthy.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
Yes you'll want a document even if just for protection from you defaulting, and your parents should claim the interest they earn as income, unless it really is a gift, or at least the interest is a gift.