Lender's calling partner's money a "Gift"

[Matt Vaughn]

So I need some help - I'm new to this.

I just put an offer on a deal in Maryland that I'm pursuing with a family member (my sister calls him Dad). The plan is to split ownership 50/50. He's providing $100k in cash and I'm planning to finance the remaining $100k through a conventional 30-year fixed mortgage. He said he didn't need his name on the deed - we planned to write up an operating agreement to clearly define our business agreement, but we didn't think it was necessary to add multiple people to the deed.

At the last hour, I'm hearing that my dad's $100k is going to be considered a "gift" and that a "gift letter" will likely be required. Does this sound right? Would this be viewed differently if he were on the deed?

We didn't consider this a gift - we considered this a 50/50 purchase, where he funded his half with cash and I'm funding mine with traditional financing.

The only reason I care about the "gift" terminology is if this adversely affects my dad from a tax perspective.

As it stands, I have an offer going in with my name only on the offer, and claiming a 50% downpayment that I intend to make with my father's funds (not sure if it's relevant, but I have plenty of cash and income to qualify for the whole loan independent of my dad's downpayment).

Does anyone have any insight or recommendations?

For all I know, there are a million better ways to structure this.

[Michael Seeker]

Originally posted by @Matt Vaughn:

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

The bank does not want you to be under water the day you close on the loan, which will be the case. You'll owe your dad 100K and the bank 100K + closing costs and your position in the property will be $0 or less. This is why they require the $100K from your father to be a gift, meaning you don't have an obligation to repay that AND the loan you took out with them.

[Jerry Padilla]

Hi Matt,

I would talk to a CPA about this as from what it seems like: if your Dad isn't on the deed or the loan than he will not receive the tax benefits either. But he may be able to claim it all with you. You would need it to be a gift as it looks like your Dad really isn't going in on owning the home, if he isn't on the deed or the mortgage.

[Albert Bui]

Originally posted by @Matt Vaughn:

So I need some help - I'm new to this.
I just put an offer on a deal in Maryland that I'm pursuing with a family member (my sister calls him Dad). The plan is to split ownership 50/50. He's providing $100k in cash and I'm planning to finance the remaining $100k through a conventional 30-year fixed mortgage. He said he didn't need his name on the deed - we planned to write up an operating agreement to clearly define our business agreement, but we didn't think it was necessary to add multiple people to the deed.

At the last hour, I'm hearing that my dad's $100k is going to be considered a "gift" and that a "gift letter" will likely be required. Does this sound right? Would this be viewed differently if he were on the deed?

We didn't consider this a gift - we considered this a 50/50 purchase, where he funded his half with cash and I'm funding mine with traditional financing.

The only reason I care about the "gift" terminology is if this adversely affects my dad from a tax perspective.

As it stands, I have an offer going in with my name only on the offer, and claiming a 50% downpayment that I intend to make with my father's funds (not sure if it's relevant, but I have plenty of cash and income to qualify for the whole loan independent of my dad's downpayment).

Does anyone have any insight or recommendations?

For all I know, there are a million better ways to structure this.

HI Matt the reason they are claiming this as a gift is because he is not on title its very common on residential loan transactions. The gist of it is because he will not have an equitable or legal interest in the property and he is giving you what will ultimately be a part of your equity (his gift) so the underwriter on the loan will require that this contribution be a gift because they want it to be clearly defined up front that there is no side deal that your paying your father back a predefined amount each month because then we'd have to factor in another payment to your qualification.

The pure fact they are allowing gift means this is probably a primary or vacation home.

You can look up gift tax guides on IRS.gov and search "gift tax exemption, to find more information on adverse effects tax wise. A person can gift 14,000 to each individual per year in 2014 with out restriction to the # of individuals but only a max of 14,000 per year. If you gift more than 14,000 it dips into your bucket or life time gift tax exemption which is currently at 5.34 mil I believe. If he doesnt plan to have more than 5.34 mil in assets at death then he probably doesnt have have an estate or gift tax issue.

Hope that helps.

[Matt Vaughn]

Good info. So can I get his name on the title at 50% owner without having his name on the loan? He has already chipped in his 50%, so he shouldn't have to bear the risk of co-signing my loan.

I had heard that this could all be clarified in a well-written and jointly signed operating agreement, but I guess not?

[Bill Gulley]

It's a gift the way you have it structured. He can go on title with you, he doesn't have to go on the loan but he will have to sign the deed of trust. :)

[Dion DePaoli]

This does not seem correct. You need to address this with your loan officer.

You are describing the loan and other features but you have not come out and said how you are purchasing this property in regards to Occupancy. You and your sister are buying it and your father is willing to post up half of the purchase price for the both of you.

Do either of you plan to live there for at least 2 years?

Do you have to pay your father back?

Those are the two most important questions that need to be answered before we can give commentary.

If that answer is "NO" for residence, then the underwriting here is not correct. Maybe the loan is submitted under the wrong Occupany, which could be a bigger issue.

As was pointed out, Gift Funds are ONLY allowed in properties that will be the Primary or Second Home or one of the borrowers. Usually the family member who gift's funds does not go on title and they are not a mortgagor. There is no obligation to do either. If the money is a gift, it is not to be paid back.

[Account Closed]

No loan with a newly formed llc. Name on title not allowed by bank, due to potential collateral complications. No way around it. Your dad wants to eat the bread (title) he needs to help bake the bread (bank loan). If he wants protection he can write a lien taking second position on the house, or write a loan direct with you

[Matt Vaughn]

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

[Albert Bui]

Originally posted by @Matt Vaughn:

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

These scenarios are very common usually the title is taken in your name only and proceeds are split on the backend at sale or down the line through a cash out refinance if funds are needed earlier

[Dion DePaoli]

Ok, I gotcha.

So his funds are precisely a gift. As such he needs to deliver a gift letter which says there is no repayment.

He can be vested onto title which can handle his interest in the real property subsequent distributions when sold. You can hold title a couple of ways that is going to affect you and your wife and he, you should speak to an attorney about the best methods. I am thinking you can do Tenants in Common where you and your wife are 25/25 and he is 50. Joint Tenants would mean each of you are equal 1/3 (provided your wife joins title). Three familiy members, one is your wife. Family matters can get sticky and should be planned for properly. Talk to some professionals in your area that help with estate planning and family trusts. Plan for the worst hope for the best.

Moral of the story, the funds you dad gave are a gift and the underwriter is requesting the letter properly per what you have described.

[Michael Seeker]

Originally posted by @Matt Vaughn:

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

The bank does not want you to be under water the day you close on the loan, which will be the case. You'll owe your dad 100K and the bank 100K + closing costs and your position in the property will be $0 or less. This is why they require the $100K from your father to be a gift, meaning you don't have an obligation to repay that AND the loan you took out with them.

[Matt Vaughn]

Originally posted by @Michael Seeker:

Originally posted by @Matt Vaughn:

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

The bank does not want you to be under water the day you close on the loan, which will be the case. You'll owe your dad 100K and the bank 100K + closing costs and your position in the property will be $0 or less. This is why they require the $100K from your father to be a gift, meaning you don't have an obligation to repay that AND the loan you took out with them.

Good point. So I get that it's going to be considered a gift now - my only curiosity is why it's considered a gift when he is getting 50% of the property in return? I don't really care what they call in my particular situation, but going forward, when I do a deal with you, for example, if I provided the funds and you found the deal, and we split it 50/50, would my cash be considered a gift?

[Michael Seeker]

Originally posted by @Matt Vaughn:

Originally posted by @Michael Seeker:

Originally posted by @Matt Vaughn:

@Dion DePaoli , the intent is for this property to be fixed and occupied by my wife and me. My father intends to invest 50% of the price in exchange for 50% equity in the property. I intend to secure a loan for the other 50%. There is no expectation that these funds would be paid back, except upon sale of the property, at which time he would have a 50% stake in the equity.

The bank does not want you to be under water the day you close on the loan, which will be the case. You'll owe your dad 100K and the bank 100K + closing costs and your position in the property will be $0 or less. This is why they require the $100K from your father to be a gift, meaning you don't have an obligation to repay that AND the loan you took out with them.

Good point. So I get that it's going to be considered a gift now - my only curiosity is why it's considered a gift when he is getting 50% of the property in return? I don't really care what they call in my particular situation, but going forward, when I do a deal with you, for example, if I provided the funds and you found the deal, and we split it 50/50, would my cash be considered a gift?

Nope - a 50/50 deal is different than an OO purchase. If you're getting a conventional fannie or freddie underwritten loan, then they may require your "partner" to cosign on the loan and be on the deed (not 100% sure on this). Otherwise, set up an LLC and use commercial loans or hard money and you don't have to worry about it :)

[Michael Seeker]

That may not have been clear, but an OO loan is different than an investment loan.

[Wayne Brooks]

@Matt Vaughn

It needs to be considered a gift because he is Not legally getting half the property, as you said he won't be on the deed. Otherwise, it would be considered a loan.

[Dion DePaoli]

Oh gosh.

The distinction here is different than what is being guessed.

If you loan me money which I then use as down payment, the first thing that happened is I entered into a loan with you (Senior) and the second is I gave a mortgage and got a loan from another lender (Junior). Violia, we have a conflict of seniority.

To avoid this, the money is merged into the transaction. In OO loans, the money is gifted. So this says the money does not have to be paid back and is not attached to the property.

They are calling it a gift because gifts do not establish ownership nor do gifts have to pay back. And that is what this is. The fact that you are allowing him on to title has no bearing to the mortgage. So while that idea makes it make sense to you, the Lender doesn't care and they do not want to know.

In regards to business relations, related to capitalizing an enterprise and title. Your ideas are not on line there either. You are not properly understanding what title is and how it works in short. The amount of capital you provide is not a determination for ownership interest in title at all. It is it's own idea.

In the same example, you provide the funds, title can be vested in any number of infinite ways frankly 90/10, 10/90, 50/50/ 60/40....infinite. You are likely confusing owner's equity in a company with title in real property. In short, they are not the same. Let's know worry about that for right now either.

[Matt Vaughn]

Thank you, all, for the clarity. I appreciate your help with this.