Buying a House with Somebodies Else's Cash

My in-laws recently got a huge windfall off the property they sold outside Philadelphia. As a result, they used 35% of the proceeds to purchase a condo, and are waiting to see where we end up after having our baby in a few weeks. 

My local housing market is a cash-buyers dream. Good increase in property values means even if you're paying a few thousand for a property, you'll like get it back in equity after a few years, but only if you buy in certain neighborhoods. 

That means of course that you've gotta have cash on hand ready to buy these places, which many locals do not, so we consistently get beaten by out of towners and investors. We settled on a place outside of town, which has it's pros and cons, but ultimately I think we'd either like to build outside of town, or buy back in city limits. Having cash would be rad in both cases.

Now, whether we stay in Arizona or move back east, I think there are definite advantages to buying a house cash. Out here, we'll just need more of it. 

Is there a way my in-laws could lend us money, buy a house all cash, then swap to a mortgage to pay them back?

To avoid the taxes, they'll want to call it a gift. $14,000 annually from individual to individual.

Consult someone who really knows what they're talking about, but I believe that means that you're looking at $14,000 to you from your FIL, $14,000 to you from your MIL, and $14,000 to your spouse from your FIL, and $14,000 to your spouse from your MIL. You can do this once a year--right now you may even be able to backdate the checks to Dec 31, so you could do it twice for a total of $112k. That would be very iffy though.

Then when you get the mortgage, you'd get that in cash. To pay back your in-laws, you'd have to be wary of the same $14,000 a year per person to person. 

Otherwise, they could cosign the loan with you. That may actually be the easiest way to do it. Be careful though, all sorts of "loan in disguise" stipulations. It is supposed to be a gift, not another loan.

What kind of taxes are we talking here? 

Do people put such money into living trusts or what have you? Some way of giving multiple folks access to cash, but not having to technically "give" it to someone? 

Gift taxes. 

Just have your parents buy the house with you, then take out a mortgage to buy them out after you own it. The purchase transaction between you and the seller doesn't have to be at the same time or have anything to do with the mortgage transaction between you and the bank.

You want to talk to a mortgage broker, they know the rules and how best to handle non-standard situations like this.

That said, it sounds like you're in a market where houses regularly get multiple offers, and you want to be able to make a cash offer to having it be more appealing to the seller without needing to offer a bunch of extra money to make up for the uncertainties of financing approval?  If so, then I don't know if a loan from your in-laws is likely to look more or less appealing than a traditional mortgage to the seller.

One thing to pay attention to is the mortgage interest deduction rules.  I'm not a CPA, but I seem to recall that mortgage interest is only deductible if the mortgage was taken for the purpose of purchasing the house, and that if it's considered a "cash out refinance" then there's a much lower limit that applies ($100K?  Something like that).  So if it were something like your in-laws write you a check as an informal loan, you deposit it, make a "cash" offer, and then refinance into a traditional mortgage to pay them back then the mortgage might count as a cash-out rather than purchase debt.  IIRC the rule has to do with the purchase loan needing to have been secured by the deed to the house.  This is a bit complex, and if it matters to you then you should definitely check with a CPA.

https://blog.taxact.com/family-loans-lend-my-kids-money/

What's funny is that the market seems to be really over-valuing cash offers. 

My in-laws got an all-cash offer at asking price on their last home. Great! Except the buyer still made a list of demands that I thought was ridiculous, considering the market. Still, my in-laws were so fluxomed by the cash offers they made the repairs at a cost of around $8,000. 

Likewise, we made an offer with traditional mortgage-based financing, and had to close the deal without any repairs made to the house. 

It seems to be that the advantage of cash offers is that idea of "I will pay what you're asking, no wait, if the house meets my requirements in terms of inspection." I think a lot of buyers like that. 

When we were looking, we got beat on two houses that we offered OVER ASKING by at least 5% because other offers UNDER ASKING were offering cash. Dafug? Don't you sellers want more money?

In reply to pheller :

Bird in the hand. 

A mortgage contingency is the one thing that can kill a deal until the last second at closing, and sellers know this. A cash buyer is perceived as a strong buyer. 

If you offer me 5% extra but are not able to close the deal, I'm stuck. I pay expenses, fees, taxes, insurance, my mortgage payments, I  don't get to keep your earnest money, AND  I loose momentum on the sale. 

Have you considered getting pre-approved?  It helps the perception. 

How much do your in-laws trust you?

If your name was added to the account the funds are in, you could legitimately call it yours. You could make a cash offer referencing the account number in your offer, but come to the closing with a check from a lender. 

But the risk would be yours. If the lender failed to come through, you'd be on the hook for the cash deal.  You wouldn't have a mortgage contingency. 

Have the old people buy the house with cash. In their name. Then buy the house from them either as seller financed or on your own mortgage.

Putting your name on their account makes the money yours but creates tax implications. You are, for most tax purposes, being given a gift or specifically avoiding inheritance taxes.

In reply to mtn :

Unles your in laws estate is gonna be worth more than $11million, gift/estate tax does not come into play.

Ovid_and_Flem said:

In reply to mtn :

Unles your in laws estate is gonna be worth more than $11million, gift/estate tax does not come into play.

You still have to file the gift tax forms/etc, just in case the estate becomes worth that amount or (more likely) the <expletive deleted> politicians decide to bring the limit down again.

In reply to codrus :

Yes...form 709 has to be filed for gifts over $14,000 but no tax will be due unless the donors estate exceeds $11 million.

The estate tax provisions were implemented in 1916 and feds have continuously raised threshold for 102 years.  I don't see it happening ever as to lowering exemption.

It’s not a gift if you’re going to pay it back. GIft tax and lifetime exemptions don’t enter into it since it’s not a gift! Write up a simple one page loan document and you’re  good to go. Give them a market rate interest if they want it or the interest free loan could be the gift. 

In reply to dculberson :

True...interest rates have to set at what's called applicable federal rate (varies depending on length of loan).  And, lender/in laws have to declare interest payments as income on their return.

The lawyer in me wants to complicate scenarios...in laws could purchase property as a 1031 like-kind transaction and possibly avoid capital gains taxes on their sale of property where they realized a windfall.  But there I go ...

In the PNW gift tax/estate exemption starts @ ~$2M. But that doesn't apply unless you don't pay it back. Though I think the interest you should be but aren't charged on that loan can be considered income.

I did an owner financed loan through my parents and it was super easy.

dculberson said:

It’s not a gift if you’re going to pay it back. GIft tax and lifetime exemptions don’t enter into it since it’s not a gift! Write up a simple one page loan document and you’re  good to go. Give them a market rate interest if they want it or the interest free loan could be the gift. 

I believe it needs to be recorded against the deed if you want the interest to be deductible.

the rules vary by state for a lot of real estates stuff

In California you can be co owners, with it set up that when one of the owners dies, the property goes to the survivor.  

I did something similar once.  My parents bought the house with cash, then 3 months later I purchased it from them with a mortgage.  Easy.  If you want them to purchase it and then gift it to you, there would be big tax implications.  The last I checked the gift rule was $10k per parent, but that could apply to both you and your wife, so $40k per year.  Anything over that is taxed gift tax rates which used to be like 50%.  Not sure what the current rates are.

Johnboyjjb said:

Putting your name on their account makes the money yours but creates tax implications. You are, for most tax purposes, being given a gift or specifically avoiding inheritance taxes.

Ok, teach me something...

i am neither a lawyer nor an accountant, but I am questioning this. 

Each of my parents has added my name to their bank accounts. The reason is so I can easily access some of their money on their behalf if anything happened. 

But it's not my money. I've never touched it, and won't (though I know I could).  It wasn't a gift. And I certainly didn't file any tax forms. When they pass away, I will split the money with my brother as part of the estate, not claim it for me. 

I am a signator on their account. Could I abuse it?  Sure. But I am also an unlimited general power if attorney, so my ability to abuse the situation is already in place. 

Id be quite happy to argue this with the IRS. I think intent has a lot to do with it. If it wasn't intended as a gift, it's not a gift. 

Am I wrong?

I wonder how many very rich people can exploit this in a way that you are thinking, Paul. 

With trusts or estates that are managed by outside entities, Grandpa Joe and Grandma Ethel both put a few million bucks into a trust. They have access to it, but they don't managed it. They add their 3 kids, their 10 grandkids, and a few great grandkids to the trust/estate with varying degrees of access to the funds. 

When great grandkid Joe IV wants to buy a house, can he just pull money from the estate that he is allowed access to? 

In reply to SVreX :

Not a gift, Paul.  No donative intent.  At best you are merely  a fiduciary or constructive trustee.

In reply to pheller :

What you are describing is a generation skipping trust. Money held for benefit of trust wards with children as benficiaries upon parents dearh.  Do it all the time in estate planning.  Used to be very common but now that estate tax exclusion so high not really necessary.

But what if parents aren't dead?

What if, instead, it's a bunch of brother who pool money together and vote on how to spend that money...say buying family vacation properties or investing in busineses? They aren't a business themselves, they all work for their respective employers, but they pool money together to purchase things with say...a higher rate of return than they could by themselves.