Ok, I am hoping to not make this sound confusing because I don't know all the details yet. I am living in my inlaws house (long story) hoping to buy the house in a few years. I am not paying rent but am paying the utilities since my family of four will be using most of it. My inlaws will only be around a couple months in the summer. Say the house is appraised by a realtor at 219k. I have a couple senerios with this option.

1) They are willing to do a certain payment a month with the option to buy the house at the end of 5 years putting that money we paid into the house. If we did that would they be subject to paying renter's tax as if they are a landlord? Mind you they are tehcnically living in the house keeping their residence p in Ny instead of Florida.

2) If they sold us the house for 190000 and we paid 20 or 30k. Would that be subject to a gift tax knowing it's being sold to a relative (daughter).

Related to that how much lower could they sell us the house without being subject to taxes?

If possible can you provide links that would describe this. I have looked on my own but didn't totally understand what I was reading. We are going to check with a real estate or tax attroney but thought in the mean time get your ideas. Thanks

Joe

1. I don't know how "renters tax" works in NY, but I would assume that as a landlord they must report their income and deductions for operating a rental, even if they happen to live in it.

2. If they sell you the house for below market value the difference between market value and selling price is considered a gift. They can make a gift of up tp $13K per person per year without any gift tax implications - your in-laws could each gift $13K to both you and your spouse, for a total of $52K. Any gift above that level must be reported on a gift tax form, though no gift tax is actually due unless the value of all gifts reported by them over the years exceeds $2million.

Bottom line is that no gift taxes are due unless they make very substantial gifts. If your in-laws have an estate that is likely to exceed $2M they should talk with an estate planner on the best way to do this.

Thanks for your quick response, ebaines.

Instead of 'lease to own' in 5 years, is there some reason why they can't sell it to you now and write you a mortgage that is only for 5 years?
I've done that with family. The IRS publishes the lowest allowable rates under 'intra family loans.' The rate adjusts monthly but not by much. The rate is different for different terms, I think under 9 years and over 9 (there may be a very short term too, I forget).
It's definitely worth it, but they will have to pay taxes on it as you will be able to deduct it.

If they don't want to pay taxes on income for the next 5 years, then it would be best to just let you pay utilities and foot the bill for other things like property tax and repairs, and if any more is due, increase the sale price of the house.

There's been different options floating around. They had some circumstances that didn't allow us to iron out the details. She (mil) has a brother who owns rental properties that is telling her things. Unfortunately, his financial state and hers is totally different and he is basing it on his. I am going to talk to a lawyer one of these days anyway and findout for sure but I was wondering what any one else thought. We are paying utilities and taxes and light maintenance. Anything that is major is up to them. We are to save up a certain amount each month to be able to pay for a down payment in 5 years.

The thing is we wouldn't be able to get a mortgage right now because we can't give a downpayment and we already owened a home so FHA is out. We have talked about them holding a mortgage but I'm not sure they can afford that either and buy another house.

Thanks for the reply.

My suggestion wasn't to go out and get a mortgage, but to have your MIL write you a mortgage privately - no fees, no closing costs, no credit checks - just a family loan. The IRS governs the minimum rates allowed. It's a good deal for all concerned. If MIL wants to write it as a 30 year typical loan and 'call' it in 5 years, when you are able to get a loan from a bank, then the intra-family loan ends.

Bottom line is that you can't afford a downpayment. So if they need that money to buy another house, its not going to happen. If they don't, there is no reason they can't take back a private mortgage. With a 5 year balloon payment.

In this way, the interest is income to them, but you own the property and can deduct the taxes and interest.

Of course if they don't won the house free and clear, that presents a problem.

Scottgem, they do own the house free and clear so they are good there. I think the problem lies is that they wanted to help us get out of our current house, while helping them with the taxes and utilities since they were only going to live in the house for 2-3 months in the summer. That way it's not vacant in the winter, also. We just haven't worked out the details yet because other circumstances have happened (go figure, right?). They wanted to do certain things that you all have mentioned, but are afraid of getting hit with massive taxes they heard they were going to get by doing these options. Thanks for all your help.

As noted, they can each gift $13K to a single person. So they can gift $52K to you and your wife to cover the downpayment. So they can sell you the house for $219K, You can give them $25K (split the difference between 20 & 30K). You then sign a promissory note giving them a mortgage of $142K (219-52-25). They will be liable for capital gains taxes on the difference between their cost basis and the $219K, but they may be able to defer that.