Will this deal work? - Posted by Keith

import · July 31, 2001, 2:13pm

Posted by pwn on August 21, 2001 at 23:09:54:

You need to look into the tax consequences of this for yourself and for your mother. “Zero interest” on a loan is not considered an “arms length” transaction (transaction between two rational persons). I think the tax man will look at it as a note with a “pro-forma” interest at the current market rate. This would reduce your tax basis on the property, and when you sell you may have to pay higher capitol gains. You might be better off setting a low rate than no rate. Otherwise your mother may be stuck with taxes on “interest earned” at the current market rate.
Also, you may be better off having your mother sell the house outright (if it was her primary residence she shouldn’t have to pay taxes on the gain) and give you “gifts” of< $10,000 a year.

import · July 31, 2001, 2:13pm

Posted by Keith on July 31, 2001 at 14:13:25:

Will this work and is it a good idea?

My mother is going to build her a new house for 120,000.

She is in a house that appraised for 175,000 with a 45,000 balance.

She will sell me the house for 155,000 and owner finance at 0% interest. I will need to rent for enough to make her new house payment. My payment $430 and her payment $775. The house should rent for $1000 to $1200 per month or could I owner finance for 175,000 at 9%???

This will be my first deal in rental property. Thanks for any and all help and comments

Keith

import · July 31, 2001, 7:15pm

Re: Will this deal work? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on July 31, 2001 at 19:15:45:

Keith:
Sounds like a “sweetheart” financing deal for you. If you “sell” the home and finance the $175K @ 9% over 30 years (360 months) then it will produce a payment of around $1,400.00 ($1,408.09).

If you rent it out, as you stated it will rent for between $1,000.00 - $1,200.00 per month.

If she finances YOU with ZERO interest on the $155K at lets say $1,000.00 per month, then your obligation to her is paid off in full in 155 months.

As long as your Mom clearly understands that she is in essence transfering her equity in her current home to you quickly by financing you with NO interest and that after the 155 months have been collected on the debt by her, that the income to her is over with, then this is a way for you to build up Net Worth quickly.

One word of caution; make sure of the temrs of repayment remaining on the existng $45K she still owes on her house and that this debt will extinguish itself as well over time before your 155 month obligation to her, otherwise you will STILL owe this debt later on.

To your success,
Michael Morrongiello