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SFace
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2010 Nov 8, 7:27am
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.
Mark_LA
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2010 Nov 8, 8:33am
-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.
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We just wrote a $425k cash offer on a home. The property requires all cash due to it missing necessities; the previous owner gutted it prior to foreclosure.
I've got $280k to my name and all my aunts and uncles have all chipped in to loan me the other $145k. Once I purchase the property, I will replace all the necessities and make it habitable. I will then take out a $200k loan against the property to repay my aunts and uncles, and have a bit of pocket cash.
Does anyone know about the tax consequences of the $145k cash loan? What's the best approach for this scenario to avoid/minimize taxes? I expect to repay the full amount with a cash-out refinance within 3 months.
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