How to pay back family investor for downpayment contribution in 20 years?
A family member is helping us with the downpayment for our new 2 family home. He basically paid half our downpayment. He doesn’t want any return in the short term and won’t be responsible for any bills or get any mortgage benefit. He wants it like a long term stock investment. But we’re stuck on…
A family member is helping us with the downpayment for our new 2 family home. He basically paid half our downpayment. He doesn’t want any return in the short term and won’t be responsible for any bills or get any mortgage benefit. He wants it like a long term stock investment. But we’re stuck on how to get him back the money. Assuming the property appreciates, is there any way to return his original payment plus appreciation without him having to pay tax on ordinary income (versus a capital gains tax on real estate, which we would pay on our real estate (presumed) gain.) How could we return what may be a six figure payback (since the gift tax takes effect after $48K). Should his name be on the deed? Grateful for answers or any pointers in the right direction to a tax or legal advisor who has handled such a situation before (willing to pay for the service too.)
WJ, I am sure there are ways to structure this to minimize the tax implications identified above. A gift followed by a return of a much bigger gift sounds like it might be about the worst way to think of this. Is this a loan? An investment? Find an accountant who is also a lawyer (many are both) to help you structure and memorialize this so that you accomplish your goals, make all obligations and financial arrangements with your family crystal clear, minimize the tax implications, and comply fully with applicable laws.
Vinca’s is good advice. You don’t want this thing becoming a bugbear down the road.
WJ: I am a blue collar worker–certainly neither attorney nor accountant–and not going to attempt to offer the guidance you should absolutely obtain from a professional. I do, however, know something about death, families, and original agreements and intentions that blur over time. Put your agreement in writing, and do it with the help of a knowledgeable and mutually-respected professional. You might want to discuss a forgiveable loan, with minimal annual interest payments at an agreed rate, and a balloon payment at “x” rate triggered by event(s) of your naming. If you provide an Email address, I will send names of two people who impressed me at seminars (but with whom I have no other personal experience).
Important — don’t forget that you’re subject to paying income tax this coming year for the amount transferred between your relative and yourself for the down payment (minus the gift tax deduction). Current gift tax rules allow up to $11,000 to be given from one person to another without tax, and anything over that follows the gift tax rules and would apply to you as income. This would apply to you even if your relative wrote the check straight to the seller.
You’ll also incur a gift tax when you return a payment back to your relative.
The IRS has information on the details of the gift tax regulations at:
http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
Alternatively, you could just suck it up and treat it like the investment income that it is.
Why not spread the repayment out over 2 or 3 (or 4 …?) years when the time comes. That way you can keep it within the gift limit.
Thx Vinca – Andrew was my first stop and he told me he had no practical advice, only theoretical research! I read the bw article too and it had no other sources to pursue!
Just put his name on the deed. When you sell, family member or his heirs will get the profit. Work out the percentage w/him, no need to spend $ on advice from professionals. Write it out and go to a notary public.
Try googling economist Andrew Caplin, New York University. He and others have done work designing standardized shared equity mortgages, somewhat akin to Islamic funding models. Also, in April 2007, BusinessWeek reported on family members helping out by taking an equity stake in their younger/poorer relatives’ homes.