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jonc · Apr 12, 2007, 06:59 PM

My father and I purchased a house when I was 17. Because I had no need for the tax benefits I was a "silent" partner. I am now 25 and my wife and I want to take ownership on the property. The property appreciated around $200,000. My father wants to pull his portion of the house and put it into another property.

My question is this, What is the best way to accomplish this without having to pay a lot of taxes, and without having the property taxes bumped up to the new value?

Is it possible to refinance the home and add myself and my wife to the title and new loan, then after a period refinance again to remove his name and pull his money out?

Thanks for your help.:confused:

Dr D · Apr 12, 2007, 07:45 PM

Buy the house from your father. Set the sales price high enough to cover the amount needed to pay off the existing mortgage + the money your father wants + enough to pay all the closing costs for buyer and seller + enough to accommodate a "Gift of Equity" from your dad to you equaling 20% of the sales price. With an 80% Loan to Value loan you won't have to pay Mortgage Insurance. That way you will each get the desired result with the least cost, and no cash out of pocket. Don't do two loans, as they cost money. If the home was his personal residence he gets up to a $250K freebie from the Feds. If it was an investment property he will have to pay taxes. In most places your property taxes are adjusted to market values whether you just bought it or have lived there for 20 years. I hope that this addresses your concerns.

Fr_Chuck · Apr 12, 2007, 07:59 PM

Since tax laws of various places are different, since you want to protect your ownership rights most of all I am sure, and since he wants to pull money out, and it appears this is a higher value home, I would get a real estate attorney look over it and give a professional opinoin.

jonc · Apr 12, 2007, 08:00 PM

Originally Posted by Dr D

Buy the house from your father. Set the sales price high enough to cover the amount needed to pay off the existing mortgage + the money your father wants + enough to pay all the closing costs for buyer and seller + enough to accomodate a "Gift of Equity" from your dad to you equaling 20% of the sales price. With an 80% Loan to Value loan you wont have to pay Mortgage Insurance. That way you will each get the desired reult with the least cost, and no cash out of pocket. Don't do two loans, as they cost money. If the home was his personal residence he gets up to a $250K freebie from the Feds. If it was an investment property he will have to pay taxes. In most places your property taxes are adjusted to market values whether you just bought it or have lived there for 20 years. I hope that this addresses your concerns.

Can a property be sold that much undervalue? Say the home now is worth $500k, and the loan balance is $200k. Will the mortgage company like that?

froggy7 · Apr 12, 2007, 08:42 PM

Originally Posted by jonc

Can a property be sold that much undervalue? Say the home now is worth $500k, and the loan balance is $200k. Will the mortgage company like that??

Why would they care? The mortgage company is only loaning you money. They want the house to secure the loan, in case you default, but as far as I know, they don't care if the house is worth more than the loan. Is there a difference to the mortgage company if the house is worth 500, and I get a loan for 200 and pay 300 cash, or if I just buy the spot for 200k with a loan?

Now, the state might get interested if they think that you are doing it to hide assets for some nefarious reason. But that's a different kettle of fish.

Dr D · Apr 12, 2007, 09:43 PM

This type of transaction is VERY common, between blood relatives, especially between parent and child. The LTV is based off the sales price or appraised value whichever is less. The lender would give no thought as to it being an improper transaction. If both you and your father understand and agree to the terms, a decent lender and or escrow officer should be able to structure it. If you wish to spend the money for an attorney, then I would seek out one that specializes in Real Estae rather than a GP. I have done a number of loans where an attorney was a principal to the transaction and wrote their own purchase contracts. In every case the contract was so poorly written that a 6 month Realtor could have done much better. This is not meant as disrespect to the legal profession, but just my luck of the draw. If the dad were trying to hide assets from creditors, the Preliminary Title Report would disclose any liens and judgements. This is just my professional opinion.

jonc · Apr 13, 2007, 05:13 AM

Is the "gift" route any cleaner? If he were to give me the house, would the current mortgage come due? Is there a way for me to get my name on the current mortgage and title without getting a new loan?

Dr D · Apr 13, 2007, 08:00 AM

If he were to just give you the house, the mortgage having a Due on Sale clause, would require a pay off. Depending on what type of underlying mortgage is on the home, it MAY have a provision for a full qualifying assumption (probably not), but he can check with the lender. If that were the case, such an assumption would entail escrow and title costs, which would have to be paid again at time of refinance. It is best to do it in one shot as I outlined in my original post. Try to get a referral to a good, knowlegable Loan Officer from a friend or relative. Try not to get one of the whiz bang Disneyland loans (think about a 30 year fixed). Also have your dad check with his tax preparer to see if there are tax implications for the gift of equity. Good luck.

jonc · Apr 14, 2007, 08:49 AM

Back to your original post. I understand most of what you said... but what is the purpose of the "gift of equity" for 20% of the sale price.

Dr D · Apr 14, 2007, 01:35 PM

The purpose of the "Gift of Equity" is to give you a minimum 20% stake in the property, thereby eliminating the need for Private Mortgage Insurance, easier underwriting, and more favorable pricing for the loan. For ease of arithmetic, let's say that your dad wants $100,000 for the house which is worth $200,000. The LTV is based on the sales price or appraised value whichever is LOWER. If the SP was $100K and you had no money to put down, the LTV would be 100% unless you could put $5K, $10K, $15K, or $20 of your own cash down. By setting the SP at $125K, with a $25K Gift of Equity, the LTV is now 80%. Be sure to add to the SP enough to cover all the closing costs for you and your dad, unless either or both of you wish to pay those out of pocket. Your lender should be able to give you a good ball park figure as to what those would be. I hope this clears it up.

jonc · Apr 14, 2007, 07:18 PM

When we purchased the property I put in 50k and my parents put in 25k. So I have more equity than they do. So... the gift isn't necessary?

Dr D · Apr 14, 2007, 08:19 PM

If you were a silent partner, not in title to the property and not on the loan, then you have no standing as far as the property is concerned. Obviously since you were 17 when the property was purchased, you were not of legal age to participate in the transaction. You must have mowed many lawns to accumulate $50k by that age. You could always approach the purchase from your dad as a standard sale and document the repayment of a debt from your dad to you, as the source of your down payment; but I guarantee that route would be a nightmare. My original suggestion of a Gift of Equity stands, as the path of least resistance. I am beginning to wonder if this is a real situation, or just a hypothetical scenario.

jonc · Apr 14, 2007, 08:51 PM

Thanks for your input Dr. D. The situation is very real. Hopefully we will be able to work it all out here in the next few months. The renters are out the end of June.