Buying a house from parents

[Will Dougherty]

Hi All, Working on my first deal and will actually be purchasing a house from my parents as they look to free up some cash and are ready to move on from it. We have been researching the best strategy to go about transfering it with the least amount of taxes and interest paid. They have some other bills that they intend to pay off with the money from the sale so I’ll be taking out a mortgage on the house. We are also working on seller financing for part of the cost to lessen the amount needed to hit 20% as we don’t think it makes sense to pay PMI here. basically thinking ill make monthly payments to them over the next 2 years. I am going to purchase the house for less than what it is going to appraise for so I’ll be able to refinance and pull out money this time next year to buy a primary residence (still living at home currently). My question is if there are any strategies or options here that would transfer the house with the minimum amount of taxes and interest being paid? If you were selling a property to one of your kids, how would you go about it? To give you an idea of the numbers.. see below.. House sell price 130,000-140,000. 20% down payment. Should appraise for around 165,000-175,000. Currently rents for 1300/mo. Along with the down payment we are working on a monthly number (3-400/MO) over the next 2-3 years to pay to justify them basically giving me 25-30,000 in free equity to refinance out to out towards another property. Hopefully that made sense, thanks in advance for your time/feedback.

[Eamonn McElroy]

@Will Dougherty

We're all over the map here....

Selling to kids at less than fair market value (FMV) = gift tax exposure and possible gift tax filing obligations. Use of lifetime exemption.

Seller financing = installment sale from parents to you at (bare minimum) federal funds interest rate.

No really enough info.  Do your parents own the house free and clear?  It appears they do.  Really you should engaged a tax CPA/EA who will examine your situation.

If your only goal is to be able to buy a primary residence, why don't your parents cash out refi, gift the money to you, preferably under the annual exemption (multiple years if necessary), and you buy a primary?  In the end, you inherit the house and receive stepped up basis.

A lot to consider here...facts, circumstances, and goals...