Home Buying in Montebello>Question Details

Mmw323, Home Buyer in Montebello, CA

I'm looking to buy my retired parents' home. They are planning on moving out of the country as well. The

Asked by Mmw323, Montebello, CA Wed Jul 22, 2009

home is assessed by the county at $430k with homes selling in the area for ~$600k.

I want to buy the home to take advantage of tax deductions for mortgage interest and property taxes paid. Since my parents are retired, they can't take advantage of these deductions because of their low income, but I can. So I would like to purchase the home from my parents for as low of an amount as possible to reduce future property taxes that I will have to pay. What's a reasonable amount that will not bring the IRS to my door?

Also, are there any other issues that may be unique with this? We'd definitely go throught the escrow process. I'm not sure if I need a third party to service the loan, so that we will all get legitimate tax forms for our tax filings in the future.

Thanks in advance for the advice.

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Shel-lee Davis - BRE #01817412’s answer
Please send me your contact information and I will send you the referrals. Thanks.

Shel-lee Davis
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
http://shel-lee.listingbook.com
0 votes Thank Flag Link Wed Jul 22, 2009
Thanks again. Yes, I agree with making sure everything is at fair market value. I can honestly say that I believe this is an appropriate transaction. I believe the transaction will occur at arms-length terms. However, I need to make sure that the gov't sees it the way I do as well.

Do you recommend that I speak with an accountant or attorney? If so, could you please provide me with references, as I do live in southern California. Thanks.
0 votes Thank Flag Link Wed Jul 22, 2009
A couple of things to keep in mind.

1. What you pay for the house will be your tax basis when you sell. So paying less now may come back to bite you later.
2. You do not have to involve a bank or mortgage lender in the transaction, however, you should involve an attorney or accountant to make sure the deal points and mortgage documents are done correctly. In a transaction that is NOT "arms length" (which is what this would probably be considered under the law), you need to make sure that the documentation is correct. Otherwise, you stand the risk of seriously compromising the tax benefits to both buyer and seller. I cannot stress this enough. Make sure the appropriate professionals are involved in structuring the deal and reviewing the documents.
3. If your parents do not want to service their own loan (which means filing the annual 1098 Mortgage Interest Statement required to allow you to take your mortgage, and possibly other reporting requirements on their end), then they can use a mortgage servicing company to do this. The attorney you use in part 2 above should be able to make a referral.

Your statements about "I already have determined the optimum amount of interest to pay per year based on my tax bracket and my parents'." and "I do not mind paying more to my parents as it's still in the family" could be viewed by the IRS as an attempt to avoid taxes. Make sure your deal with your parents has as many "fair market value" elements in it as possible AND speak with an attorney. Please!

Dare to Dream.

Shel-lee Davis
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
http://shel-lee.listingbook.com
0 votes Thank Flag Link Wed Jul 22, 2009
Update, I'm definitely planning on getting a loan/note from my parents. I already have determined the optimum amount of interest to pay per year based on my tax bracket and my parents'. Interestingly, it's better for me to pay over a 30-year time frame and I do not necessarily want a low low interest rate, as that will reduce the tax savings I get (I do not mind paying more to my parents as it's still in the family).

The property tax information referenced is interesting. Basically, there's no reason then to want a lower price then since it will not affect the county's assessment of the value of the property, correct?

Besides going through an escrow, do I need to involve a mortgage lender or bank to facilitate the monthly mortgage payments to my parents?

Thanks.
0 votes Thank Flag Link Wed Jul 22, 2009
Good morning:

Correct me if I am wrong. It sounds like you want to purchase your parents home and have them carry the note. Is this correct? You are also looking to keep the property taxes low. This sounds like a true win-win situation.

Well you are in luck on the property taxes. I have referenced a page from the LA County Tax Assessors website that speaks to this issue. Two pertinent quotes from this information are:
"Proposition 58 states that real property transfers, from parent to child or child to parent, may be excluded from reassessment." and "Transfers by sale, gift, or inheritance qualify for the exclusion."

That being said, I strongly encourage you to speak with an attorney &/or accountant who is knowledgeable in this type of transaction. A little forethought could save you a ton of grief in the future. You want to make sure that your parents get the full benefit of selling on an installment sale basis and that you get the full mortgage tax deduction. Don't leave this to chance. If you need a referral in the LA area, please contact me through my profile or give me a call. Dare to Dream.

Shel-lee Davis
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
http://shel-lee.listingbook.com
0 votes Thank Flag Link Wed Jul 22, 2009
Mmw,

I'm not sure you completely understand how the property tax system works. It is our recommendation to do additional research along these lines prior to making any important decisions.

Good luck
0 votes Thank Flag Link Wed Jul 22, 2009
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