Have parents take home equity on their home to finance rentals?

[Jon Borowski]

Hi everyone.  I'm thinking of approaching my parents with the following scenario.  I have a feeling they would be okay with it due to my work ethic.

I live in the NY Metro area and want to get into real estate investing.

My income is around $70k, but is guaranteed to jump to around $110k-125k in two years.

My parents are retired and have a home in Pennsylvania with a value of $150k that is 100% paid off for many years now.  I am contemplating approaching them to take out a home equity loan of 75% of the value of their home which would be about $110k, and to use that money to start-up my real estate investing career.  

The goal is to purchase two multi-family homes with the $100k, one with a 20% down payment and another with a 5% down payment thru the FHA which I will live in.

Would anyone consider this a good or bad idea?  

[Peter Myers]

I am a bored tax lawyer and occasionally visit this site.  The tax and legal advice above is generally wrong, but not in a mean-spirited way.

This is information only and not legal advice.  You must consult your own tax adviser and lawyer to get proper advice.

Each donor-donee has a $14K annual gifting exemption.  Its not a limt, its just an amount that is exempt from the gift tax.  So if your parents each give you and your spouse $14K, then you get $56K in exempt gifting.  Any amount above that reduces their lifetime exclusion ($5.45 million per person) by the amount of the excess.

The gift (of any amount) is not income to you nor a deduction to them. You cannot gift income under the assignment-of-income doctrine, so don't even go there.

Gifting to an LLC is not exempt. The donor reduces his lifetime exclusion amount by the amount of the gift.

LLC's are used primarily for asset-protection and continuity of management purposes. They are not generally used by laymen for tax reduction, although high-end planners will use them for that purpose in different scenarios way beyond the scope of this post.

I generally like your idea, not necessarily because it makes much money, but because it is a fairly low risk way to enter the business.  If I were advising your parents, I would have you choose one of the two properties to purchase.  The point is that the education you get from jumping in is going to be far more valuable than the few dollars this investment might accidentally yield to you or to them.  Keep a journal of your mistakes, especially, and your occasional wins (which are likely to be occasional at best, given that this is your first investment).  Report to a mentor at least monthly.  Take a class or independently learn how to read a financial statement and how to prepare a tax return (and Schedule E in particular).

Good luck.