Posted by John Merchant on November 22, 2002 at 22:09:07:
A deal like this could have some serious drawbacks. If a new institutional first mortgage is involved, the HUD 1 loan application inquires as to what the down payment is. If the loan applicant fills in the blank with a non-existent or fictitious down payment sum, and deliberately conceals from the lender that
There really is NO down payment, or
The Seller is really providing the down payment, or 3. The Seller is carrying back a 2d mortgage on the property…if any of these things exist, and the main lender is misled or deceived, then this could be illegal fraud under Federal law…and subject to criminal prosecution.
Sadly,I’ve seen a number of deals where the mortgage broker was actually encouraging the borrower applicant to LIE about this and state some kind of non-existent down payment.
Those mortgage brokers are themselves breaking the law in “winking” at these false statements, and ought to be put out of business.
Now, there may be nothing in the world wrong or illegal about “gift of equity” but just be durned sure that you don’t sign some kind of loan app or doc stating some kind of non-existent down payment…because no matter what the banker or mortgage broker might say…that is fraud on the lender!
We are looking at selling our home and buying my parents home, who are in turn going to buy my grandparents home. A woman from the bank called regarding our mortgage application and suggested that we use a gift of equity from my parents. How exactly does this work and are there any disadvantages from either our side or my parents side? Will we have to pay taxes on the gift?
Posted by Stephen Asbill on August 01, 2003 at 19:42:02:
Yes, Look up these tax codes: title 26 section 121, Publication 544, and Publication 523. Basically they state that on a PRIMARY RESIDENCE (PR) sale, the seller does not claim the income on his tax return if he does not have a gain of over $250,000 single owner, or $500,000 filing jointly. This means that if he bought the house for 155, and sold it for 135, he wouldnt have a gain at all to claim. Even if he sold it to you for 175,000 he would only have a gain of $20,000, not even close to the $250,000 limit for single owner.
If this were a sale of land, any income would be considered taxable income, but since its a primary residence, regardless of relationship, and the gain for the seller is under $250,000, publication 523 gives instruction to the seller to not claim the income from the sale of their main home on their taxes.
Now, publication 544 states that since the gift is a percentage of the price, the seller isn’t selling his property for the full amount. If the seller gifts you 20%, thereby only selling 80% of his property, there will be an adjustment to his cost basis and your future cost basis. This means that when you sell the home, you have to add that amount to your cost, which probably is beneficial to you anyhow because it offsets your gain.
Posted by e*star on November 22, 2002 at 16:06:45:
We did this when we bought our home from a family member. Our mortgage officer suggested that we write up the purchase price for $10,000 more than what we had agreed on, thus, she gifted us $10,000 in equity. I don’t know of any negative implications, because I believe this is tax free. And now we have twice as much equity into our home than we would otherwise.