Re: no qualifing required here - Posted by Frank Chin
Posted by Frank Chin on December 05, 2002 at 09:09:29:
Hi Dave:
There are more issues involved than interest rates.
We done RE gifting within our family with the advice of a competent CPA. The property involved is a rental which gives rise to capital gains tax on the part of the donor. The property had a very low mortgage as well, and for discussion purposes. almost free and clear.
If the parents are to act as the bank, they can loan 100% LTV with no need to up the value. For estate planning reasons, appraisers can within reason lower the appraisal by 10%. When my mother in law did hers gifting we told the appraiser we needed a lower appraisal, rather than higher.
Our CPA recommended against gifting the entire property via a large note. If a 375K note is forgiven at 22k a year, it would take a total of 17 years to be fully forgiven. This assumes relations among the parent, child, son and daughter in law remains amicable over 17 years. Problem is parent can stop gifting after year two after a big fight.
The better way is to gift an equity to forgiven over a 3 year time span, 4 years at the most. In this case:
1- Parents refi a 275K mortgage.
2- Child assumes mortgage
2- Child executes 3 notes totalling 66K, forgiven over 3 years.
The beauty of this is the 275K cash out can be placed in the bank in the parent’s name with child a co-signer. With this:
1- No need for parent ot hold an illiquid 375K note.
2- Parent can gift cash from year four onward.
3- Parent can pay capital gains form the cash proceeds if needed for rental property.
4- Child can borrow from the 275 bank account to do REI or fix the house.
Much more flexibility than parent holding a 375K note. With interest rates at a 40 year low, why note borrow from a bank?
Frank Chin