patrick.net

Hmm...May be IRS will think 145K as a gift. But I may be wrong.

Appears none. This is not a gift. The free interest is a gift, however, it would be under the 11K or so threshold before it is subject to gift tax. Document that the cash is a loan and will be repaid.

Yeah that's what I was thinking too. But I've been reading and there may be 2 alternatives.

-I can pay them interest on the $145k loan to avoid taxes. But they'd have to claim the interest earned as income. I really want to avoid this route since it most likely will trouble them when they do their taxes.

-I can get gifts from each aunt and uncle under the legal limit for gifting. Not too sure how this works.

I definitely will consult a CPA/tax advisor but would like some input so I can have items to discuss with the CPA.

I think you have to draw up a promissory note to document cash is a loan subject to repayment. Try a CPA or better yet an estate atty to get this done for your family. Congrats on your new home. Happy remodeling.

Thanks dittomichel. We'll have to see if our offer gets accepted first. There may be competition.

vain says

-I can pay them interest on the $145k loan to avoid taxes. But they’d have to claim the interest earned as income. I really want to avoid this route since it most likely will trouble them when they do their taxes.

No, you get a 0% loan from them (if they agree & it appears they do based on your statements). Make sure you create, and preferably notarize, a promissory note for this: http://bit.ly/nolopromissory . They earn nothing from this, so no need for them to claim the interest as earned income on their taxes.

You then need to count the interest savings as a gift. The IRS considers the short-term (less than 3-years) AFR (minimum interest that must be charged on loans) for loans between relatives to be 0.49% annually. So in effect, you'll be getting a gift of $710.50 per year from your relatives: http://www.irs.gov/pub/irs-drop/rr-10-26.pdf .

As SF ace stated above, this is below the $11k threshold, so it isn't subject to a gift tax.

SF ace says

Appears none. This is not a gift. The free interest is a gift, however, it would be under the 11K or so threshold before it is subject to gift tax. Document that the cash is a loan and will be repaid.

I didn't see this post earlier. $11k or so is the threshold, as in the real gift to me; the free interest?

Where will I document this? Nobody is wiring money to me. They are giving me cash.

Zlxr says

You then need to count the interest savings as a gift. The IRS considers the short-term (less than 3-years) AFR (minimum interest that must be charged on loans) for loans between relatives to be 0.49% annually. So in effect, you’ll be getting a gift of $710.50 per year from your relatives: http://www.irs.gov/pub/irs-drop/rr-10-26.pdf .

Thanks to the both of you. It's been bothering me the whole day and now I feel much better :)

Zlxr says

But my question is why would you want to spend so much money on place that has basically been stripped?

I say borrowing my relatives' money seems the easiest. The bank really doesn't seem to be interested in entertaining any loan contingencies. The listing says cash-only and that basically weeded out almost all of the competition. The only thing making it inhabitable is that it doesn't have a hot water heater (they removed it because they paid for the upgrade i suppose), light fixtures, bathroom sinks, and 1 toilet. This house is so easy to turn around it sounds too good to be true.

Zlxr says

Also - water heaters are not upgrades. They typically come with the house. They should have left the sinks and the toilet as well. My thinking is that anyone who would take the water heater and the toilet was possibly angry and I would check for possible further damage.

The piping is set up for an energy efficient tank-less water heater. The 1 toilet that was left is a $350 Toto toilet. I really want to see the sink because they left a $350 toilet, but took the sink. So it just seems the owners took everything they bought with the bank's money.

Looking at the house and the property tax records, it seems the previous owner took HELOCs to remodel the entire house. But they busted shortly after that. The home is still gorgeous.

I believe you will run afoul of the IRS's imputed interest rules. Here is a partial explanation.
http://www.ehow.com/about_5097624_irs-imputed-interest-rules.html

Run this past a very good tax attorney or accountant first.