Purchasing a home through contract from a family member

4 Replies

Hello - 

I'm in the process of purchasing my first Single Family Investment property and I have a few questions as to how to go through with the purchase -- My Father has offered to be the bank as I don't have 25% down for an investment property -- but we believe this property is a solid deal and I would like to capitalize on that.

Background:

  • My father has offered to pay 100% of the home in a cash offer to assist in getting a better deal, 
  • I would be responsible for paying ~25% of the loan back inclusive of interest, within 12 months (essentially, the entire first year would be spent building equity and repaying the loan)
  • At which point in time, I will be responsible for going to the bank and getting a 75% LTV mortgage for the remainder of what is owed to repay him his capital.
  • The purchase price is low enough on the house that there should be no concern regarding depreciation or 12 months time being enough to pay back enough for a 75% LTV to be possible.
  • When the offer is agreed upon, whatever the purchase price may be, would be the exact same price as what the contract would be. Therefore, there is no "gifting" of equity, or trying to screw Uncle Sam.

Essentially, as I do not have enough capital for 25% down, and I will not be living in this property - I'm curious as to how this will look to the IRS. 

Questions:

  • Can we legally put the house in my name? (I know in working with lenders in the past, any money in excess of $15,000 is considered a "gift" and needs to be taxed appropriately).
    • Further, those funds typically have to sit in my account for ~60 days. -- but we aren't using a lender here.
  • Should my father put the house in his name and we transfer ownership at the end of the 1 year agreement?
    • What happens when he "sells" the property (aka title transfer) to me at the end of the 12 months? 
    • Would he incur any taxes?

Any help / understanding is greatly appreciated!

Thanks,

Dan

I think I know some of those answers, but I don't know all the details so if I were you I would talk to an attorney and a CPA. You and your dad need to understand the tax and legal implications for each of you and get help structuring this precisely in the way that works best for both of you. And you need a contract with exit strategies that cover what happens if you can't pay him back in a year. Good luck!

Make a legal contract.  I will say that again get a lawyer and make a legal contract. I speak from experience on how a family deal can get totally messed up when not in writing.  You will feel like you can save a few bucks, you will feel like its plain as day what you are agreeing to BUT what you say and what he hears may be two different things. You also need an accountant.  I am not saying don't do it but make sure everyone understands the agreement. That is also your best protection when it comes to the IRS. Good luck.

Originally posted by @Dan C. :

Hello - 

I'm in the process of purchasing my first Single Family Investment property and I have a few questions as to how to go through with the purchase -- My Father has offered to be the bank as I don't have 25% down for an investment property -- but we believe this property is a solid deal and I would like to capitalize on that.

Background:

  • My father has offered to pay 100% of the home in a cash offer to assist in getting a better deal, 
  • I would be responsible for paying ~25% of the loan back inclusive of interest, within 12 months (essentially, the entire first year would be spent building equity and repaying the loan)
  • At which point in time, I will be responsible for going to the bank and getting a 75% LTV mortgage for the remainder of what is owed to repay him his capital.
  • The purchase price is low enough on the house that there should be no concern regarding depreciation or 12 months time being enough to pay back enough for a 75% LTV to be possible.
  • When the offer is agreed upon, whatever the purchase price may be, would be the exact same price as what the contract would be. Therefore, there is no "gifting" of equity, or trying to screw Uncle Sam.

Essentially, as I do not have enough capital for 25% down, and I will not be living in this property - I'm curious as to how this will look to the IRS. 

Questions:

  • Can we legally put the house in my name? (I know in working with lenders in the past, any money in excess of $15,000 is considered a "gift" and needs to be taxed appropriately).
    • Further, those funds typically have to sit in my account for ~60 days. -- but we aren't using a lender here.
  • Should my father put the house in his name and we transfer ownership at the end of the 1 year agreement?
    • What happens when he "sells" the property (aka title transfer) to me at the end of the 12 months? 
    • Would he incur any taxes?

Any help / understanding is greatly appreciated!

Thanks,

Dan

 As long as it is documented as a loan then there is no issue. A mortgage should be recorded showing him as the lender. 

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

Thanks all! Appreciate the great feedback. I was initially reaching out to hear if anyone had anything the knew of that would be unusual since it was with a family member.

A quick update: Accountant stated that as long as we treat it as a a loan and follow the IRS's AFR (applicable federal rate) as our interest rate and have that documented in the agreement of the loan, we should be OK from a tax perspective.

(for anyone in a similar situation, these rates change quarterly)

Further, we most definitely will have an attorney draft up the contract to ensure we're covered. While family - we most definitely want to keep business separate.

Thanks again.