Mortgage payoff or gift?

[Tara Yoder]

So my FIL (father in law) currently holds the mortgage to our home. We would like to do a cash-out refi and we have run into challenges because of the privately held mortgage. We need to know for tax purposes should he write a lien release to be filed with the county that the debt is paid off or would we be better off to have it drawn up as a gift? If it is gifted will that cause more challenges with the cash-out refi?  Thanks all 

[Ashish Acharya]

Originally posted by @Tara Yoder:

So my FIL (father in law) currently holds the mortgage to our home. We would like to do a cash-out refi and we have run into challenges because of the privately held mortgage. We need to know for tax purposes should he write a lien release to be filed with the county that the debt is paid off or would we be better off to have it drawn up as a gift? If it is gifted will that cause more challenges with the cash-out refi?  Thanks all 

 How much is the mortgage? 

Gifting is a better strategy. Your fil and mil can basically gift you and your spouse 60k a year without gift tax under annual exclusion and more than that under lifetime exclusion. 

Canceling a debt can create an income based on how debt was structured.