My parents and I are going to co-invest in a NYC condo which will be my primary residence. We'd like to keep the transaction relatively simple and avoid tax issues. Has anyone here ever done this before? Using rough ballpark figures, the condo is $1 mil and we would like to make the ownership 50 / 50% (will be put into a legal contract). But at closing, the cash will be 40 / 60% (me / parents). My... [more]
My parents and I are going to co-invest in a NYC condo which will be my primary residence. We'd like to keep the transaction relatively simple and avoid tax issues. Has anyone here ever done this before?
Using rough ballpark figures, the condo is $1 mil and we would like to make the ownership 50 / 50% (will be put into a legal contract).
But at closing, the cash will be 40 / 60% (me / parents). My $400K will come from a mortgage (only my name) and I will take $600K from them as a downpayment.
While $500K of my parents' cash represents their stake, the additional $100K is a gift of sorts. Do you know if this is typically monitored by IRS and/or is this $100K taxable to me? The $100K might actually end up being more like $200K, so this could really be material.
A couple of potential ideas that have been suggested to me. Hopefully there are other possibilities, any suggestions would be very welcome!
1) (somewhat obviously) make the ownership structure match the cash payments at close. It could be a declining ownership structure (say a couple of percent each year which could reflect the legally giftable amount of $20K+ per year)
2) have parents get a savings / checking account at the bank with the $600K so it was never "given" to me (which is collateral that the bank can hold and lend). I'm not sure if I totally get this.
3) Have a legally binding $100K loan with them, which would presumably have to include some nominal interest (partly defeats the purpose by increasing my near term cash flow burden).
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Response by nyc_sport
about 16 years ago
Posts: 820
Member since: Jan 2009
Ahh, the Parents Bank, N.A. Best lending terms around.
None of this likely will be as easy as it sounds. Since you say the ownership structure will be formalized, talk to a lawyer now and figure out how you are going to accomplish this, including in light of your parents overall tax status and estate planning. The gift tax limite is $13K per person per year, so two parents can give you $26K per year. Exceedng this is not actually taxable but has estate tax consequences, particularly if the estate exceeds the tax threshold, and there is a lifetime gift limit.
I highly doubt that you will get a mortgage on a 50% interest, and your parents likely will have to co-sign since the bank can only foreclose by foreclosing on the entire property.
Are these things monitored by the IRS? Depends upon what you and your parents say on those tax returns signed under penalty of perjury.
(1) If you are going this route, you probably want their "investment" to be a loan, as leaking the ownership interest is going to be a nightmare because the annual "gift" is some percentage of the then current market value, not the purchase price.
(2) Wouldn't be the first time this was done, but not legal.
(3) This is done all of the time. You include some nominal interest but that is "gifted" back to you, and the loan balance decreases each year by the difference between the $26K gift limit and the nominal interest.
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Response by maly
about 16 years ago
Posts: 1377
Member since: Jan 2009
Your parents need to talk to a lawyer to figure out the best way to structure this "investment" for tax and estate consequences. That's why they make the big bucks.
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Response by nyc10023
about 16 years ago
Posts: 7614
Member since: Nov 2008
What nyc said. You can also time the closing for the new year, so you get 4X13K = 52K. Have you thought about getting them to pony all the cash and have you get a mortgage from them (duly recorded and everything).
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Response by NYC10007
about 16 years ago
Posts: 432
Member since: Nov 2009
Lawyer up my friend. Also be careful relying on what your broker says, they are going to encourage you to do whatever it takes to get the deal done based on what they've "seen done before," but it's your ass on the line, not theirs.
Wish my parents would pony up $600k to help me in my current search, now I know why there is so much competition for the apartments my wife and I are looking at. But that's just my bitterness speaking.
Please tell me you're not 23 years old and one year out of college...that will just depress me.
I love Manhattan, I love Manhattan, I love Manhattan...
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Response by awfernan
about 16 years ago
Posts: 7
Member since: Jan 2009
Thank you for the feedback.
To be clear, my parents will give me the $600K ahead of time, we'll fill out a gift form for the bank to prove it's not window dressing, and so when I secure my loan I will have the $600K balance sitting in my account. From the bank's perspective, my parents don't really exist.
I did talk to a lawyer, structuring the ownership part is not hard, but I will probably have to confer with a tax person. My mortgage broker works with a couple, probably the lawyer too.
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Response by semerun
about 16 years ago
Posts: 571
Member since: Feb 2008
I am not very knowledgeable on this topic..but have you factored in the 100k difference and who is responsible for common charges. Are they paying into the common charges/taxes- if not, wouldn't that have some effect in the distribution of ownership?
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Response by PMG
about 16 years ago
Posts: 1322
Member since: Jan 2008
Parents can loan you $100k or whatever at some nominal IRS stipulated interest rate, and that loan can be forgiven at $13,000 per person or $26,000 per year, as long as they both are living, as a IRS approved tax-free annual gift. Within four years, the extra money they contributed will have transferred to your pocket gift tax-free. Your parents are the ones who should be concerned about this. They are the ones liable for a gift tax.
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Response by front_porch
about 16 years ago
Posts: 5325
Member since: Mar 2008
What PMG said -- gift of over $26K per year is taxable to the parents, not to you. The trouble is that since you're getting a gift letter for this year for $600K, I imagine they're on the hook for taxes for the other $574K (at a rate of 35% I think, but double-check with your accountant on that).
More importantly, if you are telling bank $600K is being gifted, and yet parents are taking half title, it sounds like mortgage fraud to me. You DO absolutely need to hire a lawyer to walk you through this.
ali r.
DG Neary Realty
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Response by shong
about 16 years ago
Posts: 616
Member since: Apr 2008
Gifts from family is allowed from the bank's perspective. If the gift is 20% or more than the whole down payment can be a gift. Your parents should talk to their accountants about tax implications. You can use the joint account route but the banks require the funds to be seasoned. There are a couple of options but it depends on what your main concern is. Is it the tax implication, how title is going to be held? Of course, this is all just coming from a bank underwriting guideline perspective. sunny.hong@bankofamerica.com
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Response by manhattanfox
about 16 years ago
Posts: 1275
Member since: Sep 2007
Your parent can gift is a actually a loan of which the $26K per year of value -- over 4 years to the 100K -- A loan, which is forgiven, year by year.
Ahh, the Parents Bank, N.A. Best lending terms around.
None of this likely will be as easy as it sounds. Since you say the ownership structure will be formalized, talk to a lawyer now and figure out how you are going to accomplish this, including in light of your parents overall tax status and estate planning. The gift tax limite is $13K per person per year, so two parents can give you $26K per year. Exceedng this is not actually taxable but has estate tax consequences, particularly if the estate exceeds the tax threshold, and there is a lifetime gift limit.
I highly doubt that you will get a mortgage on a 50% interest, and your parents likely will have to co-sign since the bank can only foreclose by foreclosing on the entire property.
Are these things monitored by the IRS? Depends upon what you and your parents say on those tax returns signed under penalty of perjury.
(1) If you are going this route, you probably want their "investment" to be a loan, as leaking the ownership interest is going to be a nightmare because the annual "gift" is some percentage of the then current market value, not the purchase price.
(2) Wouldn't be the first time this was done, but not legal.
(3) This is done all of the time. You include some nominal interest but that is "gifted" back to you, and the loan balance decreases each year by the difference between the $26K gift limit and the nominal interest.
Your parents need to talk to a lawyer to figure out the best way to structure this "investment" for tax and estate consequences. That's why they make the big bucks.
What nyc said. You can also time the closing for the new year, so you get 4X13K = 52K. Have you thought about getting them to pony all the cash and have you get a mortgage from them (duly recorded and everything).
Lawyer up my friend. Also be careful relying on what your broker says, they are going to encourage you to do whatever it takes to get the deal done based on what they've "seen done before," but it's your ass on the line, not theirs.
Wish my parents would pony up $600k to help me in my current search, now I know why there is so much competition for the apartments my wife and I are looking at. But that's just my bitterness speaking.
Please tell me you're not 23 years old and one year out of college...that will just depress me.
I love Manhattan, I love Manhattan, I love Manhattan...
Thank you for the feedback.
To be clear, my parents will give me the $600K ahead of time, we'll fill out a gift form for the bank to prove it's not window dressing, and so when I secure my loan I will have the $600K balance sitting in my account. From the bank's perspective, my parents don't really exist.
I did talk to a lawyer, structuring the ownership part is not hard, but I will probably have to confer with a tax person. My mortgage broker works with a couple, probably the lawyer too.
I am not very knowledgeable on this topic..but have you factored in the 100k difference and who is responsible for common charges. Are they paying into the common charges/taxes- if not, wouldn't that have some effect in the distribution of ownership?
Parents can loan you $100k or whatever at some nominal IRS stipulated interest rate, and that loan can be forgiven at $13,000 per person or $26,000 per year, as long as they both are living, as a IRS approved tax-free annual gift. Within four years, the extra money they contributed will have transferred to your pocket gift tax-free. Your parents are the ones who should be concerned about this. They are the ones liable for a gift tax.
What PMG said -- gift of over $26K per year is taxable to the parents, not to you. The trouble is that since you're getting a gift letter for this year for $600K, I imagine they're on the hook for taxes for the other $574K (at a rate of 35% I think, but double-check with your accountant on that).
More importantly, if you are telling bank $600K is being gifted, and yet parents are taking half title, it sounds like mortgage fraud to me. You DO absolutely need to hire a lawyer to walk you through this.
ali r.
DG Neary Realty
Gifts from family is allowed from the bank's perspective. If the gift is 20% or more than the whole down payment can be a gift. Your parents should talk to their accountants about tax implications. You can use the joint account route but the banks require the funds to be seasoned. There are a couple of options but it depends on what your main concern is. Is it the tax implication, how title is going to be held? Of course, this is all just coming from a bank underwriting guideline perspective. sunny.hong@bankofamerica.com
Your parent can gift is a actually a loan of which the $26K per year of value -- over 4 years to the 100K -- A loan, which is forgiven, year by year.
Why are they taking half title? Joint tenancy?