Promissory Note Property Transfer

[John McDonald]

Hello, 

I have a unique situation going on and was seeking extra confirmation and ideas on the current deal I'm in.

Basically the property is transferred via deed, I sign a promissory note for a set amount, and record a deed of trust. This creates a formal lien, making it a financed purchase-even though there is no cash change in hands.

Once property is appraised, I apply for a cash out refinance. As the lender sees the lien, and agrees to pay it off at closing. Looking to schedule under delayed financing exception, from the lien being recorded, paying it off at closing, and the transaction mimics a cash purchase.

Concerning the property transfer would be filed as form 709 (life time gift exception) from the current owner to me.

As well as the note is receivable, essentially they are lending me money secured by the property. So when the note is paid off via refinance, They receive principle repayment which is not taxable income correct?

Just curious if anyone has any experience with similar transactions? And if there is other things to keep in mind, thanks.

[Patrick Roberts]

Delayed financing is only for cash purchases. This would be a seller financed purchase - the seller is financing the transaction because youre not paying cash for the house. This is just a normal purchase and sale. You would not be able to complete a cashout refi until normal seasoning requirements are met. The various lenders have different guidelines for this, but you may be able to use a purchase money loan to payoff the seller financed note before cashout seasoning is met. This would be subject to purchase LTVs, asset sourcing for the downpayment, etc. 

This is not and would not be a gift, and claiming it's a gift when it's not so that the seller doesnt have to pay taxes is tax fraud. You are buying the house from the seller, and the seller is financing your purchase while taking a security interest (the deed of trust) in the property. The seller would likely be taxed on the gain on the sale as determined by their basis in the property, as well as on any interest that was paid to them. There are a number a factors that affect this, including the fact that this could be considered an installment sale. You need to consult a tax professional on this part.