Avoiding capital gains tax with a gift downpayment?

Question

My wife and I are buying a SFH investment property with my father in law. He will be the mortgage holder and we will put up the downpayment. A mortgage broker tells me the downpayment must appear to come from my father in law, the mortgage holder.

Here's the question: How does he avoid capital gains tax on the downpayment we give to him? The "gifting" limit is 13K per year.

Perhaps if we transfer title to all three of us with a warranty deed after the close, we can deny it was a gift if the IRS asks???

Thanks in advance for any input!

Steve Lafler · Answer

We plan on forming an LLC for each property purchased.

Keith Barton · Answer

How is the business end of your deal structured? If you are all participating in the investment/business activity, it might not be a gift, it might just be part of your investment in the deal. Not enough information has been given to say....

Steve Lafler · Answer

To clarify, the father in law will be the mortgagor/borrower. I'm learning. Been a business man for three decades, homeowner for a 15 years, but the wife and I are new to investment real estate.

Steve Lafler · Answer

Thanks Steven Hamilton for the sage advice. 
The father in law is not married, he can still be gifted 13K from each of us?!

Steve Lafler · Answer

Apologies for the confusion with terminology. I'm new to the biz!

Steven Hamilton II · Answer

Steve Lafler,

Actually you and your wife can EACH give him 13k for a total of 26k.

Give him up to the 26k and have all of your names recorded to the deed.  He can also gift back to an interest in the property.

No part of that is a capital transaction as far as taxes are concerned.

-Steven

Steve Lafler · Answer

Our group of three gest a better rate on the mortgage with a 25% downpayment. The FIL is willing to carry the mortgage up to a certain amount, the downpayment will bring us up to our shopping budget. FIL does not have cash for the deal, but is willing to pay the mortgage principal.

Steve Babiak · Answer

To me, "mortgage holder" means "mortgagee", which means lender.

Then there is "mortgage giver" which means "mortgagor" and that is the borrower.

So, could you clarify roles for the various parties in your original post?

Bill Gulley · Answer

Why is there a down payment requirement if your FIL is funding the deal? He can simply make a larger loan for the purchase, are you getting any conventional or other financing withh the MB?