Interest 'Free' Loans

[HoustonHorn]

The amount of income they would have to report would not be offset by the deductions for the interest they would be paying on the HEL.

I see what y'all are saying, but it can't be done without them reporting it as income.

 

[Roger]

has all this been done already? if not you might want to look into creating a family partnership or family trust. If your in-laws are both tax advisors I'm a little surprised that any of this is surprising them.

 

[HoustonHorn]

Roger:

It's the middle of tax season and they really didn't think it through until yesterday. At which point they realized it would be a problem. This has all taken place over the last week or so.

 

[gardere_owns_OU]

i learned all about this from the rooftop scene in shawshank redemption.

 

[sawbonz]

I am a little confused. Is this going to be an investment property, not your primary residence? If so, why can't you just set it up as an undivided trust with the in-laws, you, and your wife as trustees? It shouldn't matter then who funds the purchase, and any monies realized in excess of expenses would presumably be taxed at the trust level and could then be disbursed however the trustees see fit.

 

[HoustonHorn]

sawbonz...I don't know anything about trusts. However, this may or may not be an investment property. I am buying it for the lot because in 5-10 years I would like to build a residence on it. Until that time, I may try to spend some money fixing the place up so it can be rented. Which is another reason why I don't want all of my liquid assets going to meet the 20% down.

As far as setting up a trust, how quickly can that be done?

 

[chango]

In reply to:

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[HoustonHorn]

chango...nope, only brothers.

As far as inlaws go, I think I won the lottery. My wife didn't do too badly either, to be honest, but they've got two parents with health issues, so even though I'm sure they'd do it if I asked, I didn't want to add stress on them.

Oh, and my sister's married.

 

[fratboy_legend]

capital has a cost, and the taxman doesnt allow "gifts" over a certain amount for a variety of very justifiable reasons. therefore, any loan at 0% interest is in effect a gift of the cost of capital.

i have had this exact problem and strike my loans at 5%. the govt seems to let this slide, although i think you can get away with something like 4.38% as the hard floor (ask your taxman for the exact number.)

vote against the Estate tax and you chop a very big leg from under the IRS on this issue.

another thing you could do is have the parents gift you the money against their lifetime exemption, which is in the $1MM range. I am not sure of the specific mechanics here, but know it can be done.

finally, you could just have them come in as equity holders on the house and simultaneously execute a call option with them at a modest premium to the transaction price. check with your taxman on the best way to structure it.

 

[HoustonHorn]

fratboy...

Thanks for the info. I'll look into those options.

I will say that there may be some very good reasons for this, but it absolutely floors me that two competent adults of legal age cannot enter into a contract agreement without the government intervening.

This money has already been taxed.

 

[Statalyzer]

Our government is even more full of it than I previous thought. How ludicrous can our "We know what's best for you to do with your own life/possessions more than you do" policies get?