Gift for home downpayment - Person giving gift to be on deed/title

[uncgdc]

Hello all,

I am purchasing a home for my mother.  My sister will have a 50 pct ownership in the home, and will be on the deed/title, but for various reasons will not be on the loan/mortgage.  Our lender has recommended that my sister "gift" me funds for her portion of the downpayment.  In this case my sister is planning to gift me 50 pct of the purchase price, which will all go towards downpayment at closing.  I will then personally make payments against the remaining mortgage.

I am trying to understand the tax implications of this, given that my sister will be on the deed/title.  Is this a gift for tax purposes, subject to reporting, gift tax, and gift lifetime exemption limits?  Or is it a loan, because I would be "paying back" the funds my sister provided by giving her a 50% stake in the home.  Additionally, are there any other legal/tax implications I'm not thinking of.

Thanks for your help!

[M-MTax]

Sorry but this is confounding. Who is going to be on title? You and your sister? Your sister and your mom? Who?

No matter what it's only a loan if the person who receives the funds has an obligation to pay back the funds. Otherwise, it's a gift and the amount depends on the equity in the home.

[Bsch4477]

You can’t deduct the mortgage interest since it is not your home and she can’t deduct the interest since she is not liable for the loan. She files form 709 gift form and you also file one since your payments are a gift to her. You are not paying her back since the house is not yours to give. 

[uncgdc]

Sorry for the confusion.  I'll try to clarify.

My mom will simply live there - she will not be on the loan and will not be on the deed.

I am taking out the mortgage alone.  My sister and I will both be on the deed (with equal shares of ownership)

My sister wants to pay for her portion in cash.  The broker advises that this should be provided to me as a gift, and he will confirm the source of funds.  I will use those funds as the downpayment for the home (50% down).  I will then have a mortgage for the other 50%, which I will pay alone with no contribution from my sister.

I want to make sure I'm not missing something important, because all examples I've seen regarding a "gift" for a downpayment does not end up with the "gifter" having any equity in the home.   In this case my sister will be on the deed.  Additionally, I've seen guidance stating that the individual providing the gift can not have a vested interest in the home.  I think this refers to individuals involved in the actual sale of the home (e.g. a realtor or lender), but I am not sure.

Again, I think this can be considered a gift, and my sister can treat it as such for tax purposes, but just want to make sure I'm not missing something important.

Hope this is more clear.  Thanks again.

[Bsch4477]

Yes, it is a gift and you are correct that the prohibition doesn’t apply to her. You can deduct the mortgage payment interest. 

[Critter-3]

This sounds weird as heck. Why does the sister who is going to be on the deed need to gift you anything. When you go to closing half of the purchase price will be paid by her in cash and the other half will be paid by you using a mortgage. It is just that simple so why does your mortgage company need her to gift you anything?? What possible reason could the broker give you for this nonsense?

[macuser_22]

A couple of points.    Any gift over $15,000 must be reported on a form 709 (gift tax return), and to be a gift there can be no strings attached.    If something is received in exchange for the gift, such as part ownership, then it is not a gift.

[uncgdc]

Critter, that's a good point.  Initially my sister was going to contribute less than 50%.  She recently decided to contribute her full half.  Not sure if that matters, and/or if that's why the lender would be recommending she gift me funds.  One benefit is that it provides the downpayment for the mortgage, thereby not requiring any add'l funds down from me (which I'd prefer).  But I'll bring it up with the lender and see what he says. Thanks

[uncgdc]

Macuser, thanks for that info.  

[macuser_22]

You did not say if your sister wants to be a co on the loan with you or she would provide half the price in cash.

If cash then your loan and payments would be much less.  Is the loan agent suggestng a gift so that they can increase THEIR profit by getting you to finance it all.

Be careful.

[uncgdc]

For various reasons my sister will not be on the loan.  She is just looking to provide cash.  As mentioned before, just trying to figure out if this should be done through a gift to me and then I use that as downpayment on a mortgage, or as critter mentioned just have my sister buy her half outright at closing.

[macuser_22]

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@uncgdc wrote:

For various reasons my sister will not be on the loan.  She is just looking to provide cash.  As mentioned before, just trying to figure out if this should be done through a gift to me and then I use that as downpayment on a mortgage, or as critter mentioned just have my sister buy her half outright at closing.

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If she will be on the deed then many lenders will not give a loan unless a third party gives a gift and submits a letter that they will have no interest in the property whatsoever.    Otherwise if a third party is on the title the lender will have a hard time foreclosing if that becomes necessary.

And yes, gifts to purchase property  without any stings attached are done all the time.     I did it myself for my daughter and son in law but the lender wanted a letter form me stating that it was a gift and I had not interest in the property.

[Mike9241]

let's see if I got this right. say the purchase price of the home is $100K including closing costs. you will put $10K down and so will your sister.  I don't see a gift because she ends up with co-ownership with you and has paid $100% for her share of the equity at the time of purchase. each of you will own 50%.  however, you will then be obligated on an $80K mortgage.

say you pay off the entire mortgage 

do you mind paying $90K for the house but only owing 50% while your sister only pays $10K and also owns 50%? of course, you do get the deduction for all the mortgage interest.  nothing in the tax laws says you can't do this. 

say the house was later sold for $200K. you end up with $100K-$10K-$80K=$10K but are tax on 50% of $100K profit. Your sister ends up with $100K-$10K=$90K and is also taxed on $50K of profit. again nothing in the tax laws says this is improper.  we are not lawyers but if I had to guess there's nothing illegal about this.

the actual numbers will vary in part because you may sell the property before the mortgage is fully paid off. 

[Opus 17]

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@uncgdc wrote:

Critter, that's a good point.  Initially my sister was going to contribute less than 50%.  She recently decided to contribute her full half.  Not sure if that matters, and/or if that's why the lender would be recommending she gift me funds.  One benefit is that it provides the downpayment for the mortgage, thereby not requiring any add'l funds down from me (which I'd prefer).  But I'll bring it up with the lender and see what he says. Thanks

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You need to be taking real estate advice from a proper attorney, not the lender, and (to be honest) not from random strangers on an internet bulletin board.

You are possibly committing mortgage fraud.  Your sister is buying half the house but you are hiding it from the lender.  The fact that the loan salesperson is suggesting this does not mean that the underwriter or the funding agency (Fannie Mae or Freddie Mac) would approve, and that can come back to bite you in the butt later on.  (The person who is helping you apply is basically a salesperson.  The person with real authority and who is responsible for all the complicated laws and regulations is the underwriter, who won't get involved in reviewing the loan application until a couple weeks before closing.)

It's not a loan from your sister that you are paying back with the house and you don't pay interest to your sister.  It is simply that she is buying half the house but you are hiding that from the lender.  There is no federal income tax implication but could be other legal implications. 

Assuming this transaction actually goes through as you currently plan it, here are the tax implications.

1. You can deduct mortgage interest on the home you live in (your main home) and one second home, as long as you are obligated to the mortgage (it's in your name) and you are the person who pays the interest.  If your mother will be living there, this is not your main home but it can count as your second home.  If you pay all the interest, you can deduct it all, even if your sister is a co-owner on the deed.

2. You can deduct property taxes you pay as long as you are obligated (the legal owner against whom the tax is assessed).  If you pay all the property tax, you can deduct it all, even though your sister is half-owner.

3. Your mortgage interest deduction is limited to $750,000 of acquisition debt.  If your own mortgage plus the mortgage on this second (mom's) house totals more than $750,000, your deduction will be capped.

4.  Your deduction for state and local taxes (including income tax and property tax) is capped at $10,000 under current law.  Depending on the amount of state income tax you pay, and property tax on your other properties, you might not get the full benefit of the property tax deduction for this house.

5.  Even though your mortgage interest and property tax deduction might be limited, your sister can't legally deduct taxes or interest (such as the part you can't deduct) unless she also pays part of the taxes and interest.

6. When the house is sold, you will each owe capital gains tax on half the capital gain (increase in value from the purchase price).  You can't exclude the gain since neither one of you will live in the home as your main home.

You really should discuss this with a real estate lawyer.

[uncgdc]

I will go ahead and stop the conversation and contact an attorney.  It's a confusing situation that I did not explain correctly.  FWIW it's worth my lender is aware of exactly what is occurring and has suggested the "gift" process.  I am trying make sure that recommended process does not open me or my sister up to tax fraud given my sisters interest in the property.  Again, I will contact an attorney.