Newbie / Gift of Equity

[Dylan Otte]

Hi everyone, 

Newbie here to the Bigger Pockets forums, and have a question regarding Gift of Equity.  

My parents own a small mixed use building and we are in very early stage conversations about selling it to me for about half its assessed value using a gift of equity as down payment.  

My family lives in the building so I'm assuming as long as the purchase prices is $250,000 or less the capital gains tax exemption will apply to my parents, does this even apply if the purchase price is way below the assessed value of the property? 

Can gifts of equity be counted towards the lifetime gift exemption so no one will be taxed on that either?  

If I buy for $250,000 lets say, and the down payment is $50,000 (paid for with equity), and the remaining equity in the building is $150,000, I get that equity correct?  How quickly can I turn around for a cash-out-refi as soon as the deal is complete and title/mortgage are in my name?  

Can anyone recommend a Mortgage Specialist in the Minneapolis area that can walk through some of the possible hurdles/outcomes of this type of deal.  Thank you!

[Tim Swierczek]

@Dylan Otte Your gift of equity questions are best answered by a tax professional/CPA.  I recommend @John Woodrich. John, what say you?  Your situation is somewhat unique since you are purchasing a mixed-use building.  Most people know residential mortgages.  Since many people who read this will be trying to relate your situation to their situation, it's important to know that conventional mortgages do not allow gifts of any kind (equity or cash) on investment property transactions.  Since you are purchasing a mixed-use building, you will not be able to use conventional financing.  You will need commercial financing. Commercial lending at this scale is portfolio lending and so each lender's guidelines will be different, but I would expect that most, if not all, will allow a gift in this case.

Based on your profile, I would assume you live in Spain currently. If that's true, your biggest hurdle to financing would be that you do not live locally. My wife brokers commercial financing, and I taught her how so I can speak to this subject. I can tell you that most small commercial lenders do not lend to out-of-state clients, and even fewer lend to guarantors who live out of the country. The reasons are simple. They are first concerned that an out-of-country borrower will not work as hard to keep a failing property; second, they are too far away to keep tabs on the property. Third, and most importantly, they are concerned with the logistics of foreclosing on an out-of-country owner. That being said, There will likely allow you to be the majority owner of an LLC that your parents or another local family member are minority owners in.

My wife is not on BP, but if you would like me to connect you to her, please PM me and I will make that happen.