How do we utilize gift money / inheritance in REI

Question

Hello everyone! So I have a question (really more of an accounting question) but since many of you are shockingly savvy and have been involved in many deals i'm hoping to glean some wisdom from people who have maybe been down this road already or been involved in a deal of this nature. So heres what we are trying to achieve!

My siblings and I are purchasing a portfolio of properties and are using some inheritance money from our parents (still living) to help fund the transaction. Naturally my parents dont want any connection of any sort to the properties, but rather are helping fund this to jumpstart the family biz. My question is - how can we structure the payment portion from our parents in a way that does not bring on tax liability but also does not require our parents to stick their necks out by being "on the title , LLC, etc." and increasing their exposure?

We have considered buying the properties under a separate LLC entity and drafting a private loan contract between the LLC and parents (which has no legal requirement to be recorded) but i'm sure it wont be that simple. We've also considered doing an interest only loan with parents and having debt forgiven / re-nogotiated / re-fied etc each year to lower our principal balance.

Your thoughts?

Thanks in advance!

Dion DePaoli · Answer

It is not clear how much money each kid is to get.  Your parents can gift each kid funds personally.  There exemptions up to $14,000 per kid.  ('Might' be able to do each parent to each kid - ask your accountant taking total to $28k)  I will come back to that in a moment.

Each kid would then take the dollars and contribute them into the LLC. From what you describe in general there is no need for multiple LLC's or too much other complexity.

Do not make fake loans or loans that mean nothing. That is loan fraud. Do not make a loan and forgive the obligation. That would be an income event to the LLC and loan fraud.

If the amounts to be gifted exceed the $14k per kid then you can simply do it again next year (2016) or your parents will have to pay taxes on the gift. As I mentioned above I thought the IRS code allowed for each parent to give but I am not 100% certain on that provision. If both can gift tax exempt then within the next two months you could have up to $56k. If it is only one gift per kid jointly between the parents then 2015 you can do $14k and 2016 you can do $14k.

Rodney Smith · Answer

@Dion DePaoli - Thanks for your feedback. We are a little uncomfortable doing a 'funny loan' ... I will look more into the child gifting thing. Perhaps even (if the gift is per child per parent) we could really be effective in this way since there are 6 kids (including spouses)... just a thought.

@Marcus Johnson - I didn't really clarify, but we would be paying cash for the properties (with family money) so there wouldn't be any underwriters to look at the loan. The entirety of the loan would be behind closed doors and privately written from parents to kids - and there is no legal requirement to record the loan publicly anywhere. Given that a default on the loan and the ensuing 'police work' to collect collateral or repayment would be complaint driven and the parents would obviously not object or complain I doubt that anything would ever be a problem or be scrutinized. People loan friends money all the time that never get paid back, but obviously this is on a different scale and not apples to apples, but you probably see my point. Frankly it is tempting to almost do it this way and I'm sure it would probably work out OK, but still I feel like there is probably a better / more legit way to do it. I will take a 2nd look into the $14k / year gift scenario.

Marcus Johnson · Answer

A problem I've run into before is that the Underwriter whose reviewing the loan and the borrower which was me, wasn't willing to count gifted money from a relative as income and actually subtracted it from our available funds.  He said it cannot be used technically for the DP.    I believe he said there is a look back time of 60 days

Dan Bosak · Answer

Just do it as a simple loan to individuals or LLC. Since it's a loan, the money you receive is not taxable to you and the principal paid back is not taxable to your parents. If you are paying interest, the interest payments will be income to them and will be an expense to you. Also, depending how you want to structure it, you don't need to make payments. It can simply be a loan to be repaid at date X and since its your parents if you need to modify that date, no big deal.

Just make sure your accountant(s) understands what you did and why so they account for it properly and dont think that it's income or a capital contribution from you into the property.

How do we utilize gift money / inheritance in REI

How do we utilize gift money / inheritance in REI

Most Popular Reply

4 Replies