Just got off the phone with my CPA (out in California)... relocated to Denver a few months ago.
I recently refinanced a retired relative's home (I was named co-borrower hence now on Title as joint tenant)
My questions are
1. Because I did not "contribute" to the cost of the home, will I be taxed for the refi cash out as gift tax? (I pay their mortgage and taxes)
2. This relative is aware I will be reallocating the cash out amount to start a house flipping/investment business in Denver. What is the best way to purchase a project- S Corp? LLC? Sole proprietor?
3. Any recommendations on a RE accountant who can help me with these questions?
I would check with a cpa on this one for sure. Here would be my concern. The fact that you are on title and a co-borrower on the loan would suggest to me that you would not owe any taxes on the refi proceeds. We don't pay taxes on money we get in a refi.
But where I see an issue maybe coming up is when you were added to the title and included as a co-borrower. To me, I would wonder if that would be considered a gift of half the value of the home minus half of whatever amount was owed on the property at the time you were added on the deed.
And that would be where I would think you might have some sort of taxable event.
It definitely screams out to check with a cpa so you can find out sooner rather than later.
@Stephen McCracken I am a bit late to this party but I have a few thoughts.
1) I am not a CPA or attorney so this is not legal and tax advise but that doesn't stop me from having an opinion or recommending you ask a tax professional theses questions.
2) Just because you are on the loan does not mean you are on title. Perhaps the lender required that you get on title. If you were added to title, then that is a gift for your share (50%). At one time, there are one time gift exceptions with dollar limits so you might still be in the clear there.
3) The loan proceeds are not taxed. You may or may not be able to deduct the interest payments.
4) @Brandon Hall (I hope I got the right one) should be able to help you answer the questions.
For your gift tax question, the refi amount is irrelevant. You received a gift of equity from your relative. If you received this gift in 2017, the annual gift tax exclusion is $14000; $15000 if the gift was received in 2018. When your relative files his/her annual federal income tax return, a federal gift tax return will need to be included for the amount of equity that exceeded the annual gift tax exclusion. There may be a state gift tax as well. Your relative should contact his/her tax preparer for guidance.
Gift taxes are paid by the gift giver, not by the recipient.
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