Purchasing new home from parents

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Lenny23
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Joined: Tue Jun 17, 2014 11:22 am

Purchasing new home from parents

Post by Lenny23 » Tue Jun 17, 2014 11:33 am

Hi all,

I was hoping you could provide me some insight on my current situation.

My girlfriend and I are looking to purchase her parent's home. The home is valued at around $275k, but they would like to sell it to us for $220k.

1) Would there be any gift tax implications due to the low sales price?

2) We have the 20% deposit so we can avoid paying PMI. However, I was reading that the purpose of PMI is to insure the bank in the case where the home's value is less than than the balance of the loan at foreclosure. In our case, since the loan would be 20% less than the value of the home, would we be subject to PMI if we didn't put 20% down?

Thank you so much in advance!

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Duckie
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Re: Purchasing new home from parents

Post by Duckie » Tue Jun 17, 2014 6:52 pm

Lenny23, welcome to the forum.
Lenny23 wrote:Would there be any gift tax implications due to the low sales price?
$275K minus $220K equals $55K. I don't think that's enough to worry about. Plus, the annual gift tax exclusion in 2014 is $14K. So 14 times 4 equals 56 (dad to her, dad to you, mom to her, mom to you). Either way you're covered.
We have the 20% deposit so we can avoid paying PMI. However, I was reading that the purpose of PMI is to insure the bank in the case where the home's value is less than than the balance of the loan at foreclosure. In our case, since the loan would be 20% less than the value of the home, would we be subject to PMI if we didn't put 20% down?
If you are buying the house for $220K and putting down 20% ($44K) then the fact that the property may be valued higher than $220K won't subject you to PMI.

ralph124cf
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Re: Purchasing new home from parents

Post by ralph124cf » Tue Jun 17, 2014 8:29 pm

The fact that you are purchasing for $220K indicates to the bank that it is the value of the property. If you put down $44K, the bank will be happy. If the appraisal comes in at more than that, the bank is happy, because they have more security for their loan.

It would be different if you were purchasing the property for $275K, and the parents were gifting or loaning you some of the down payment.

Ralph

veekay
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Re: Purchasing new home from parents

Post by veekay » Tue Jun 17, 2014 8:29 pm

I wonder if it would be better to pay $275K for it and have them just gift $55K back to you. Then, use the $55K to pay off the mortgage. Your cost basis on the house would then go up to $275K. Lower capital gains and higher deduction of losses?

Retread
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Location: Southwest Florida

Re: Purchasing new home from parents

Post by Retread » Tue Jun 17, 2014 8:41 pm

veekay wrote:I wonder if it would be better to pay $275K for it and have them just gift $55K back to you. Then, use the $55K to pay off the mortgage. Your cost basis on the house would then go up to $275K. Lower capital gains and higher deduction of losses?
Not likely to be a taxable gain and any loss would not be deductible. Also, this might result in higher real estate taxes. Also, OP, who values it at $275,000?
Bruce
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spth
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Joined: Fri Aug 09, 2013 8:31 am

Re: Purchasing new home from parents

Post by spth » Tue Jun 17, 2014 10:23 pm

My wife and I purchased her parents' home. I am not an expert, but the only issue we had was that the mortgage company called it a non-arms-length transaction. This placed extra scrutinity on our finances and on the purchase agreement. In terms of price, it seems that a home is worth what someone is willing to pay minus fees/transaction cost. We did not worry about gifting implications on a $50,000 difference in appraised value vs purchase price.

Jill07
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Joined: Sat Mar 24, 2007 6:19 am

Re: Purchasing new home from parents

Post by Jill07 » Wed Jun 18, 2014 5:29 am

We purchased my parent's home 25 years ago. In our area, there is no transfer tax when the house sells from parent to child. This saved us a few thousand dollars at closing. There may be something similar in your area... I believe this was a local tax.

Lenny23
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Joined: Tue Jun 17, 2014 11:22 am

Re: Purchasing new home from parents

Post by Lenny23 » Fri Jun 20, 2014 8:02 pm

Thanks for all your help guys. I really appreciate it. Based on the answers it seems that I don't have to worry about gift tax and I'll still have to pay the 20% deposit.

The 275k value is a rough estimate based on other homes that are on the market in the area.

Thanks again!

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