Can I purchase an equity interest in family real estate w/o

NadCixelsyd · Joined: 25 Aug 2007 Posts: 13

My son wants to buy a condo for $150k. Our agreement is as follows:
I give him $50,000 for the down payment and he gets a $100k mortgage.
However, it's not a gift. It has the following condition: When the
property is sold, the $50,000 is to be returned. In addition, I will
get 50% of the capital gain at the time of sale. (e.g. If we sold the
property for $250,000, I would get $100,000.)

My step-up in equity (33% to 50%) is offset by his promise to pay all
expenses (like the mortgage and taxes) in the interim. It's not an
interest-free loan, it's an equity purchase. Or is it???

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Archived from group: misc>taxes>moderated

Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

NadCixelsyd wrote:

> My son wants to buy a condo for $150k. Our agreement is as
> follows: I give him $50,000 for the down payment and he gets a
> $100k mortgage. However, it's not a gift. It has the following
> condition: When the property is sold, the $50,000 is to be
> returned. In addition, I will get 50% of the capital gain at the
> time of sale. (e.g. If we sold the property for $250,000, I would
> get $100,000.)
>
> My step-up in equity (33% to 50%) is offset by his promise to pay
> all expenses (like the mortgage and taxes) in the interim. It's
> not an interest-free loan, it's an equity purchase. Or is it???

Aside from the issue of who who claims what for tax purposes (a
question not specifically asked), this isn't a tax question. But I'll
give a brief answer anyway.

It depends on a lot of things, and could go either way. Or it could be
a security (e.g. stock), which is neither but sort of in between.

You should have a written agreement detailing exactly what is to happen
under what circumstances. If you want claim an equity interest you
should also either put your name on title or put title into the name of
a partnership. In your agreement detail who claims what income and
write-offs for tax purposes, but be sure to run those buy an accountant
or tax lawyer to be sure they reflect "economic reality."

There are probably other particulars that I can't think of off the top
of my head.

Stu

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removeps-groups · Joined: 09 Dec 2007 Posts: 98

On Feb 27, 1:37 pm, NadCixelsyd wrote:

> My son wants to buy a condo for $150k. Our agreement is as follows:
> I give him $50,000 for the down payment and he gets a $100k mortgage.
> However, it's not a gift. It has the following condition: When the
> property is sold, the $50,000 is to be returned. In addition, I will
> get 50% of the capital gain at the time of sale. (e.g. If we sold the
> property for $250,000, I would get $100,000.)

This topic has come up in this newsgroup before. The interest that
you could have charged on the 50k is considered a gift. See
http://supreme.justia.com/us/465/330/case.html. However, on 50k it
would probably be well under 12k.

The 100k you would get at the end would be income to you. I don't
know if doing a partnership return would help you in anyway (in order
to take advantage of the 250k exclusion).

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Stuart Bronstein · Joined: 25 Aug 2007 Posts: 561

"removeps-groups@yahoo.com" wrote:
> NadCixelsyd wrote:
>
>> My son wants to buy a condo for $150k. Our agreement is as
>> follows: I give him $50,000 for the down payment and he gets a
>> $100k mortgage. However, it's not a gift. It has the following
>> condition: When the property is sold, the $50,000 is to be
>> returned. In addition, I will get 50% of the capital gain at the
>> time of sale. (e.g. If we sold the property for $250,000, I
>> would get $100,000.)
>
> This topic has come up in this newsgroup before. The interest
> that you could have charged on the 50k is considered a gift. See
> http://supreme.justia.com/us/465/330/case.html. However, on 50k
> it would probably be well under 12k.

That's assuming it's actually a gift. If it's either a loan or an
investment of some kind, it's not a gift and no gift tax is incurred.
Since Dad expects to get his money back (especially if they put an
agreement to that effect in writing), and with interest to boot, I
doubt there's any kind of gift involved.

> The 100k you would get at the end would be income to you. I don't
> know if doing a partnership return would help you in anyway (in
> order to take advantage of the 250k exclusion).

If the $50,000 is a gift, why would a payment back from his son of
$100,000 be anything other than a gift?

On the other hand since the $50,000 is either a loan or an
investment, his receipt of that back will be tax free, and the
balance will either be ordinary income (if it's a loan) or capital
gain (if it's an investment).

Unless the father actually lives there and has his name on the title
to the property, the $250,000 exemption does not apply.

Stu

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Dick Adams · Joined: 25 Aug 2007 Posts: 25

NadCixelsyd wrote:

> My son wants to buy a condo for $150k. Our agreement is as
> follows: I give him $50,000 for the down payment and he gets a
> $100k mortgage. However, it's not a gift. It has the following
> condition: When the property is sold, the $50,000 is to be
> returned. In addition, I will get 50% of the capital gain at the
> time of sale. (e.g. If we sold the property for $250,000, I would
> get $100,000.)
>
> My step-up in equity (33% to 50%) is offset by his promise to pay
> all expenses (like the mortgage and taxes) in the interim. It's
> not an interest-free loan, it's an equity purchase. Or is it???

This is not as simple as it appears to be and you need
a competent professional to look at it upfront and
personal.

Without detailed knowledge of the situation, it would
appear that you might want to be tenants-in-common to
avoid the annual imputed interest from what every IRS
auditor will classify as an interest-free intra-family
loan. Be aware that the IRS almost always attempts
to do that.

Your interests may be best served by having a trust own
the condo because your equity position can be detailed
out in the trust agreement.

There are other issues that will affect the value of
the property such as his ability to rent the condo.

Keep in mind that every mortgage I have sign required
me to state that the down payment money was mine and
his down payment money is not his. Thus, he must
state that it came from you and that may affect the
mortgage interest rate.

Properly structured you will have a long-term capital
gain. Improperly structured you will have annual
imputed interest and possibly ordinary income of the
eventual payout.

I have never handled such a transaction, but I am
certain you need professional assistance.

Remember tax planning only works if you do it before
a transaction.

Dick

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