Question: I am 27 years old and in the process of buying a house for me, my wife and >my daughter to live in. The house is $340,000 and I am in the fortunate >position of being able to put up $240,000 (out of $700,000 liquid net worth >invested in the stockmarket). My parents are willing to put up the >remaining $100,000 leaving me with a $340,000 house and nothing to owe to >anyone (except for real estate taxes, utilities, etc.) In sum, I’ll be left >with $460,000 in the market but a grand house completely paid for.
>I was originally going to put $140,000 and finance $200,000 through my >parents at an advantageous interest rate. However, after doing some >research, the costs and hassles associated with setting up a loan legally >and figuring out what to pay on a monthly basis, what interest can be >forgiven, etc seem far too burdonsome to make it worth the while. >Additionally, I have made so much in the stock market since 1991 (off an >$100,000 gift from my dad), I just feel like now may be the best time to >take some of these obscene gains and invest them in a different but needed >investment—-a home for my family.
>So, what do you all think? Outright ownership of this house or finance it >through my parents? If outright ownership, how can my parents best give me >that $100,000 from a tax perspective. Any insight from you more experienced >folks would be greatly appreciated.
Answer: Your parents loaning you the money is a RED FLAG to the IRS. They will question whether the interest rate they charge you is “market.” The only way to cover yourself is to have your parents charge you the minimum rate the IRS permits. Finding this rate is simply a matter of calling the IRS.
Given this, if your parents have TONS of cash, the best thing would be for them to loan you most of the money to buy the house. You deduct the interest and they get a fair (thanks to IRS rules) return. It has to be a home loan for you to deduct the interest.
If you cash in your stock gains, you have to pay taxes. If you churn your holdings anyway (so that you have a high basis for most of your holdings) it doesn’t really matter.
Let your parents “gift” you $10,000 each (total of $40K if I understand the rules right) if they want.
A lot of this depends on the tax situation of your parents. If they have to sell appreciated assets (other than their home) it might be better if you borrow from a bank. Have them co-sign if that will get you a better rate. They can still “gift” you $40k/year.
Tell your parents that they can adopt me, if they want.
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