Sale of residence to adult children

[GeddyH]

I transferred the title of my principal residence to my son, and he agreed in writing to pay me a monthly amount plus interest until he reimburses me for the value of the home.  I sold it to him at FMV and at the current interest rate.  My question is since I already put the title in his name, would this still be considered an installment sale?  Or should I consider it a gift plus a personal loan?  Thanks.

[tagteam · Accepted solution]

You should have this transaction reviewed by an attorney in your area.

See https://www.avvo.com/residential-lawyer.html

This transaction is not a gift if you sold the property to your son at FMV and are charging interest at the prevailing market rate on the note.

[TomD8]

Per the IRS:

An installment sale is a sale of property where you'll receive at least one payment after the tax year in which the sale occurs.

[Opus 17]

It's still an installment sale even if the title is transferred, I have title to my house. There is a lien on the title that shows I owe money to my mortgage bank, but the title is still in my name.  

You will need to create an amortization table that shows how much of each monthly payment is interest and how much is principle.  The interest is taxable income to you but the principal is not.  There are web sites that can do this for you.  You must also charge at least the IRS minimum interest rate.  If you charge less than the IRS minimum interest rate, you must report taxable income equal to the interest you would have received if you charged the minimum rate.  The rates are listed here, you want the long-term AFR under Table 1.  For example, if the loan was made in September 2022, the long term rate is 3.1%.  It's variable and has gone up a lot recently, so find the month in which he bought the home and make sure you are charging at least the minimum that applied to that month.

https://www.irs.gov/applicable-federal-rates

Your son is not allowed to deduct the interest on his tax return unless you take out a mortgage lien on the property and register it with the county clerk's office.  This secures the loan and gives you the right to foreclose if he stops making payments.  It also prevents him from going to a bank and borrowing more money against the home by hiding the loan he owes you.  If the loan is not secured by a lien, it doesn't count as a tax deductible mortgage on his tax return.  If you want to secure the loan with a mortgage lien, an attorney would be recommended. There will also be some fees to record the deed and mortgage at the county clerk's office.  

[Carl]

There is a lien on the title that shows I owe money to my mortgage bank, but the title is still in my name.

I question if the legality of your actions would hold up in court. Additionally, your installment sale loan doesn't appear to be secured. Also, on an installment sale there's the IRS assumption of "implied interest" which is taxable income to you. Your situation needs to be reviewed by competent legal authority.

[Opus 17]

@Carl 

You’re quoting me instead of the taxpayer. We don’t know what kind of title or lien the taxpayer used to transfer the home to his child.

[Mike9241]

@GeddyH 

with most mortgages, there is a due on sale clause, so if there was a mortgage on the property before you transferred title, it would probably have to be paid off. if you have not informed the financial institution about the title transfer run to a lawyer. this could be serious. 

if there wasn't a previous mortgage.  fine. but as stated for your son to deduct the interest the installment loan must be secured by the property. if it is not the interest your son pays you would still be taxable to you.  another thing, the interest rate you're charging must not be below the market rate, if so you would have additional interest income over and above what your son is paying. 

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