Buying Family Property

[Nghi Le]

My friend and her parents want to create new living space in their huge detached garage (i.e. turn it into a 3/1.5 house), move into it, rehab their house, and then rent it out.

They were considering between taking a HELOC or refinancing with cash out. But today a new idea came up. Her parents have been stressed over the mortgage, even though they have over 50% equity in the home. So we thought perhaps a straight purchase of the home might be the best option.

She wants to purchase the house (through conventional financing) at the price of her parents' mortgage, then get extra cash out to do the construction/rehab work.  But I just heard today that this might be considered a gift, and that she might be heavily taxed on it.  Is this true?

[Paul Ewing]

@Nghi Le  Most likely the 50% equity amount would be considered a gift.  The IRS will consider something sold at below value to family to be a gift that may result in a gift tax.  The receiver doesn't pay the tax the giver does.

The question will be what is the lowest value of the home and how does that relate to the amount she is going to buy it for?  Each year a person can give roughly $15k (you would need to confirm exact amount since it is adjusted most years) to a person without being required to report it.  This means that her father and mother could give her a combined $30k gift ($15k each) each year without triggering gift taxes.  If needed they could do the transfer in stages say 25% equity in Dec and 25% in January for $60k transferred in a couple months. 

There is also a lifetime gift allowance of several hundred thousand dollars that could be used which is separate from the annual gift limits.  This is basically pregiving their estate so could mess up estate planning if not used correctly.  She and her parents really need to talk to a CPA about what the best options are and what tax conciquences could come up.