“Subject To” would be where the property gets deeded to you taking your fathers name off the title, but he would remain on the original mortgage. He would still be responsible for the mortgage if you didn’t make the payments.
If he wants completely out of the deal then maybe he would be willing to sell to you on a contract for a year while you establish a payment history. After one year you go down to the bank and just refinance the property and pay his loan off.
If your credit is excellent you could qualify for 100% financing, but you will pay a higher interest rate for that. The best way would be to move in, make payments for 6-12 months, save all your canceled checks, and then go down to the bank and just refinance the property. The bank will give you a new loan based on the appraised value without having to come up with a down payment since they would be treating it as a refinance Vs. a purchase at that point.
Best deal structure for Father’s renthouse? - Posted by Alan Biscomb
Posted by Alan Biscomb on April 19, 1999 at 11:12:02:
My father has held a house as rental property for the last ten years
or so. My fiance and I wish to buy the house but cannot figure out the
best way to do it to minimize my fathers gains taxes, which we have agreed
to pay. Also to minimize our up front costs and put us in a position to
waive escrow and PMI. He has agreeed to sell the house to me for what he
owes on the note, about $66,000. The property has an approximate FMV of @
$95,000, and he has not yet figured the tax-basis. Both of my parents are
on the note so gifts are possible, but would that not raise the amount he
has to pay taxes on? We have come up with a few ideas, but are not
completely sure of the tax implications of each and if they are even
possible, they are:
My fiance and I agree to buy the house for 20,000 above the 66,000. My
parents gift me 20,000, thus making the mortgage amount 66,000. Our
thinking behind this one was to be able to waive escrow and PMI with the
LTV being below 80%.
Have my father re-finance to an assumable loan and then assume the
loan. We would pay the re-financing costs and any assumption costs. We
reasoned that this would still get us out of PMI and escrow, and lower the
gains tax implications, while also lowering our up-front costs. However,
we are unsure as to the availability of assumable loans in the market
today, and the tax implications of them.
I would appreciate any feedback you could give on these ideas and any other
suggestions you might have.
The basis and structure are very important - Posted by John Behle
Posted by John Behle on April 19, 1999 at 13:13:54:
He could have a mortgage over basis problem. You need to know that. If it is below his loan than he could have a taxable gain if the debt is relieved. That means a refinance, assumption and possibly even a “subject to” scenario could give him a gain.
An “Installment Sale” is taxable as the gain is received. A “wrap” provides an installment. That can look like an AITD (All Inclusive Trust Deed) or a contract for deed. Usually you want to use an AITD as contracts are not desirable in most (but not all) states.
Seller financing where some assumes the first and carries back a second is not considered an installment and could cause a debt relief problem and resulting gain even when the seller receives little or no cash.
In other words, you can’t always just give a property away. Even when people are foreclosed on, they can have a devastating taxable gain sometimes. Not that foreclosure isn’t devastating enough. At times, especially in California through ups and downs in the market, people have been burned by “Equity Skimming” where investors come in and supposed save a property from foreclosure. “Just deed the property to me” they say and then you’ll be OK. They take the rents or even resell to a flakey buyer and when the previous property owner gets foreclosed on, they not only have a foreclosure, but a taxable gain from the mortgage over basis problem.
Your father’s basis may not be over the loan, but you need to be sure to plan accordingly. It can make a big difference on how you structure the deal.
You can also consider trusts, etc. I’m sure Bill’s ears are burning already!
Re: Best deal structure for Father’s renthouse? - Posted by Bill Gatten
Posted by Bill Gatten on April 19, 1999 at 11:50:00:
Alan,
Were your parents to put the property into a land trust in their own names and make you a co-beneficiary, you would need only to lease the property back from the trust in order to have 100% of ALL the benefits of ownership, including all tax deductions, without having to to anything.
There is no cap gains tax; there is no assumption; there is no DOS violation; the property is shielded from liens and creditor judgements (even state and IRS liens); there would be no Gift or Probate taxes were your parents to pass on; etc. Your folks can even take the passive (depreciation) write-off on the property, since, as a resident in the property, you can’t use it, and the IRS would see them as holding for income production purposes.
To learn more, you might opt to click the Cal-Equity banner above.
Re: Best deal structure for Father’s renthouse? - Posted by Alan Biscomb
Posted by Alan Biscomb on April 19, 1999 at 11:34:05:
Could you explain ‘Subject to’? I am a little unsure of what that means. He does not want to carry the note for me if that is what that entails. He wants to get out of all liability, and I would rather this be totally in our names.