Is this a good idea? Selling a house and tax questions

[supertrooper1]

My FI has owned his house for about 15 years.  He bought it with his late wife and she passed away 5 years ago.  For the last 3 years, he has been splitting his time at my house (rental) and his apartment at his work.  His son has been living in his house with his family, but only paying rent for a little over a year now.  His son was covering the mortgage and taxes until recently when the bank re-assessed the tax and insurance escrow and raised it $500/month.  His son only covered half of the extra.  

Now, FI's son wants to buy the house.  He was approved for a loan which would pay off the mortgage and take out $100,000 extra, half for FI and half for himself to pay off debt (car/motorcycle/personal loans and CC debt).  In a few years when interest rates go down, he plans on refinancing and giving FI another 100K for the house.  I have my doubts about this deal-not because I'm worried FI won't see his money, but I'm worried that this deal will screw them both.  What does MM think?  

My concerns: 
1. Taxes for both FI and his son, now and when he refinances
2. FI is gifting the equity in the house.  Is there anything negative from this?  

FI and I plan on buying a house in the next 1-2 years.  I have roughly 15% of a down payment saved, and while this frees up FI's debt to income ratio and he won't have to deal with the bank by having a 2nd home mortgage, I also don't see him being able to match my down payment like he had said he would do by the time we buy a house.  

[waverly]

Mortgage companies may not be OK with an appraisal that is the true value of the house, but then the mortgage being much lower because then where did he get the money from? The fact that it is gifted equity might not be favorably looked upon by the bank, I know they can be strict about where money comes from for the purposes of the house sale. And, any lawyer would not recommend that the house is sold for 100K less than the value of the house. The son may find it difficult to refinance for substantially more when it comes time to do so.

In terms of taxes, would gifting the equity cause tax implications? gift tax? I don't know, and would refer you to a tax professional for that.

I believe that FI will 100% never see that additional 100K. If he is fine thinking of it as a gift (albeit a high one) for his son, then fine, but I don't think it will ever be repaid. And that might cause difficulties in their relationship going forward.  

DH and I have weekly finance meetings, and they have been going well. Something like that might be a good forum to ask about the down payment. But yes, I would agree that since he isn't using equity then contributing to a down payment might be difficult.

ETA- If he has multiple children, but only 1 child is getting the gift of the 100K that might cause problems in the future with other children who are not getting any kind of gift.  

[ellipses84]

Has there been an appraisal on the house or do you feel like you have an idea of fair market value based on similar neighboring house sales? It sounds like he’s potentially giving away half his equity if he never receives the remainder. Typically for financing, the appraisal just can’t be lower than the finance amount. It’s fine if he wants to sell the house cheaper than it would appraise for as a gift (essentially like an inheritance from his mother without the tax implications). I don’t think that will lower property taxes (or if it does it would be short term). I’m not an expert on this and the laws can be location specific. Mortgage brokers / realtors are usually willing to have a quick phone consultation and could answer these questions. I would not make a deal that includes a future payment for the house. There’s no guarantee he’ll be able to refinance and that’s not a wise MM decision to take equity out of a house to pay off old debt.

Money / family can cause a lot of drama or avoidance so I’d want it to be a cleaner deal for the house. Sounds like your FI is having to pay OOP monthly because rent isn’t covering expenses, so I would probably prefer to sell it if I were him. Then he can save that money for a new house downpayment. The only advantage of keeping the house in his name is a guaranteed roof over his son’s head even if he’s paying expenses for it. Some of the son’s ideas are red flags for me. How old is he? I’m assuming he’s married. Will his partner’s name be on the mortgage or deed? How will your FI feel if he buys the house and later loses it and needs a place to live?

If he really wants to help out his son, they could finance a fair house deal based on appraisal, then he could use the money he gets to pay off the son’s debts with a low or zero interest loan (or pay it off as a gift), but you’d want to make sure he could pay the mortgage plus a small loan payment.

I don’t know the details, but my sister bought a house from my grandma that was some sort of rent to own agreement. My grandma also owned and lived in the house across the street. When she passed away my mom (an only child) inherited all of her assets / houses and they kept the same rent to own agreement going. My sister rents out the house to her friend now and uses the rent payment to pay the mortgage directly to our mom. It will be paid off soon and my mom sold the other house my grandma lived in after a few years.

[supertrooper1]

waverly, Beau/FI wouldn't care if his son never paid him the remaining, but it would put us in a less advantageous situation when we do buy a house without that money. He only has one son and it was in his will to give it to him anyway. But his son is excited to get it into his own name and Beau won't have to worry about it when we eventually buy a house together. Even though the bank has approved his loan and said they just need to provide a gift of equity letter, it still seems too good to be true. The initial loan price is actually $400K less than it's assessed value, but the house needs a ton of work.

[186momx]

I sent you a PM.

[supertrooper1]

ellipses84, my FI wouldn't care if he never saw a penny down the road. I sound like a gold digger typing this out, but it affects our future if he doesn't get paid. If he sold it at fair market value now, he would probably clear $500K+ and we could buy a house with cash. But he wants to help his son out and his son wants to stay in this house. His son is 25, married (wife is SAHM) with 2 kids and 1 on the way. He is making double our area's average income with a good union construction job, but has often found himself on unemployment. FI would never let him lose the house and would help him with the mortgage until he got back on his feet. But yes, his son does have red flags when it comes to making bad decisions with money.

[archiethedragon]

$450k is a big gift.... as long as you are both good with that, it is great to be able to gift your inheritance while you are still alive.

[ellipses84]

I don’t think you sound like a gold digger. It’s one thing to give a family member $50k off a house or give them some of their inheritance early, but your DH still needs to consider his own future. Is he on track for retirement? If not, or if this will prevent him from buying a new house, a $100k + gift is probably too much at this point.

[mommyatty]

I think you know very well that if he does this, not only is he not going to see the money in the future, but he’s going to keep bailing his kid out, over and over and over again. I would not be okay with this at all. I think in the end, what is going to happen is that your FI is not going to have a steady retirement and you’re going to be financially supporting him while watching him financially support his son. So I think you need to go into this with your eyes wide open and with your goal to be to protect your own son’s inheritance and future. I absolutely would not allow him 50% ownership of a new house you buy together if he’s not matching your down payment. There needs to be agreement that his son is taking his inheritance early and there will not be another one when your FI dies.

I would think about how differences in ideas about money affected your first marriage and spend some serious therapy (individual and couples) contemplating how this is going to affect your relationship. Money issues are the leading cause of divorces in this country.

[ssmjlm]

Too many red flags for me. I get it, real estate is a shitshow, but we're not talking about the total equity being around $100k, that's barely a quarter of the true value of the home.

He could look at rent to own options for his son or pay for an appraisal and figure out how to get the son financing for maybe a reduced price.

It sounds like some tough love for both of them is necessary. Amd some formal paperwork such as a lease, etc.

[k3am]

mommyatty said it well, largely because some of us have had the benefit of hearing about their antics for years now. Leopards and their spots and all of that. And I think you already know that.

Have you considered sitting down with a financial advisor or estate attorney (honestly not sure which would or even if they could be of service) to discuss the situation and get some options? Especially when you're buying your house, you'll want consideration about how/if FI's ownership interests are handled, any community property concerns, etc.

It just sounds like a messy can of worms. But you're stuck in a delicate situation, because FI is going to want to do what he wants to do and so will his son. I don't envy you one bit here.

[supertrooper1]

mommyatty, he has a decent pension, but it probably doesn't support his spending habits. I have considered that if he doesn't contribute 50% of the down payment to a future home purchase, that we would have paperwork drawn up that it's not 50/50 ownership. I considered just buying a home in my name only when I spoke to the bank about a house a few months ago and his credit was so bad that they wouldn't put him on the pre-approval letter. But just my income alone wasn't enough to qualify me for what we wanted in this market. You and k3am are right, you've heard me complain about their spending habits for the last 4 years now and nothing has changed. Even if I voice my opinion, I still think this is going to happen, so time to protect myself and DS. But everyone here has given me some good arguing points.

[Roc A Bee]

Nope nope nope.

[sadlebred]

Nope. There are also red flags financially for your relationship unless you can afford to bail him out or pay off potentially tens of thousands of dollars in debt over the rest of your life. Why not just stay in your house regardless of what he wants? Do you "need" something else?

[polarbearfans]

I would have concerns moving forward buying a house. In my state, even if he wasn’t on the deed, once your married and if a divorce happened he would get 50% of the house value less your down payment if you can prove the funds were 100% yours and not co-mingled funds.

He will never see that extra $100k. I agree with the others that you all need to sit down and consider the future as well as tax implications to this plan. If the son is already needing bailed out with the property tax increase there is likely going to be more bailouts in the future. Home ownership is expensive. The cost seems to always go up.

[mich1]

There is absolutely no way I'd comingle funds with this person. Selling this house to his son just sounds like a bad idea altogether.

If he sells this house, he has some pretty hefty tax implications, depending on what he bought the house for. Had he lived in it himself 2 out of the last 5 years, he'd get $250K of it untaxed. Instead, he's on the hook for the whole $500K in taxes. I think they'd be considered long term capital gains, so would be at least 15% for the feds. Depending on the state, that might be another 10% or so more (my experience in NY state).

[niq]

I think "FI selling his home to his son" and "FI lending money to his son" should be kept separate. I would sell the house to the son at fair market value, and then if FI wants to set up some sort of personal loan to his son so he can pay off some high interest debt, go talk to a bank or a lawyer about how to structure that.

There have been posts about real financial pieces of work on this board and the son doesn't sound like that. Not being able to cover the increase in monthly house payments is not great, but it sounds like if he pays off some of the other debts there will be room in the budget for the higher payment. I think FI needs to think hard about how he'd feel about having to enforce the loan -- is he really going to put a lien on his kid's home, what if it takes 5 years for mortgage rates to drop, etc., what will his retirement picture look like if he never gets the money back -- but on its face I think lending your kid money at low interest to pay off higher interest debt isn't a terrible idea.

ETA: FI (or you and FI) should really go through some "what-if" scenarios with the son -- what if the monthly payment keeps increasing, what if it takes a while for interest rates to go down, do you have some way to cut your expenses or make more money if you have to, etc. etc.

[supertrooper1]

FI and I discussed this last night and I voiced my concerns that I was afraid he wouldn't see the money and taxes would be outrageous. It boils down to:

-He doesn't care if he never sees another penny from his son, but he's confident that his son will make good on the deal.
-He is sure his company's tax attorney gave him good advice and told him he'd probably end up owing about $10K in taxes and he's ok with that.
-He doesn't see us buying a house for years (which is a change from our discussions in the past). Or he doesn't see us needing the extra cash for the down payment since he won't have a mortgage.
-His son just got a raise so the payment will be roughly 32% of his income. He says his son assures him he can make that work, despite me voicing my concerns about him already talking about a new car for his pregnant wife after he pays off his debt when this goes through. He also has been laid off in the past, but between unemployment and his side hustle, he still thinks he can support his family and pay his bills.
-FI isn't factoring in his house sale into his retirement requirements.

Right now, the deal is off because they don't like how the bank is handling it. His son and wife are expecting their 3rd kid in 5 years, and I know he wants 1-2 more after this one. FI knows I'm concerned that it's always going to be something causing him to not refinance and get the rest of the money. But the idea is his son will want to refinance so he can get more equity out to build a shop, so that would guarantee FI his money too.

[VillainV]

Sept 22, 2023 17:44:34 GMT -5 supertrooper1 said:

-His son just got a raise so the payment will be roughly 32% of his income. He says his son assures him he can make that work, despite me voicing my concerns about him already talking about a new car for his pregnant wife after he pays off his debt when this goes through. He also has been laid off in the past, but between unemployment and his side hustle, he still thinks he can support his family and pay his bills.

Even buying well below market value, the mortgage payment will be 32% of his income? Yikes. This doesn’t sound like a good idea AT ALL. Can he afford major home maintenance items should something need to be repaired/replaced (water heater, A/C, roof)? Can he afford the insurance on a home that expensive? What about taxes? Utilities? Is there an HOA fee?

It seems like living in this home, even purchasing well below market value, is beyond the son’s means.

[niq]

Sept 22, 2023 17:44:34 GMT -5 supertrooper1 said:

-His son just got a raise so the payment will be roughly 32% of his income. He says his son assures him he can make that work, despite me voicing my concerns about him already talking about a new car for his pregnant wife after he pays off his debt when this goes through. He also has been laid off in the past, but between unemployment and his side hustle, he still thinks he can support his family and pay his bills.

Okay this is sounding closer to "real financial piece of work". I'll take out a loan from Daddy to pay off my car/motorcycle/other personal loans and then take out another loan for another car? That's not how any of this is supposed to work.

Even if Daddy is okay with not seeing this $100,000, what about the next $100,000?

[ssmjlm]

I think you need to protect yourself and realize you’re never going to want to be tied to this person. He is already choosing an adult child making bad money decisions.

It’s ok to leave. I’m just putting that out there for you.

[spinnaker5]

In addition to all the other good advice mentioned upthread, one more thing to throw in the mix: You said in your OP “…in a few years when interest rates go down…” There were thousands upon thousands of people around 2005-7 who bought way too much house because they were sure that “over the next few years house prices will continue to go up.” Didn’t work out great for them (or for the global economy either for that matter). The point is, in addition to what sounds like some history here with spending habits, debt etc, this assumption adds even more risk to the situation.

[midwestmama]

Sept 22, 2023 17:44:34 GMT -5 supertrooper1 said:

FI and I discussed this last night and I voiced my concerns that I was afraid he wouldn't see the money and taxes would be outrageous. It boils down to:

-He doesn't care if he never sees another penny from his son, but he's confident that his son will make good on the deal.
-He is sure his company's tax attorney gave him good advice and told him he'd probably end up owing about $10K in taxes and he's ok with that.
-He doesn't see us buying a house for years (which is a change from our discussions in the past). Or he doesn't see us needing the extra cash for the down payment since he won't have a mortgage.
-His son just got a raise so the payment will be roughly 32% of his income. He says his son assures him he can make that work, despite me voicing my concerns about him already talking about a new car for his pregnant wife after he pays off his debt when this goes through. He also has been laid off in the past, but between unemployment and his side hustle, he still thinks he can support his family and pay his bills.
-FI isn't factoring in his house sale into his retirement requirements.

Right now, the deal is off because they don't like how the bank is handling it. His son and wife are expecting their 3rd kid in 5 years, and I know he wants 1-2 more after this one. FI knows I'm concerned that it's always going to be something causing him to not refinance and get the rest of the money. But the idea is his son will want to refinance so he can get more equity out to build a shop, so that would guarantee FI his money too.

These are all big red flags to me that the debt will never be repaid and your FI won't care, or he will care more about his son and less about you.  My MIL is a financial hot mess (I'm sure she'd love a bailout from MH), and if MH ever even thought to make financial decisions that would impact us, either without getting agreement from me or even consideration for me/my feelings, that would not go over well and may result in a divorce.  (Thankfully, MH would never bail out MIL, because he has helped her out financially in the past and gotten burned (she lived with him for a short time while he was finishing college and working FT, and after a few months of her not paying him rent, he had to kick her out because he couldn't afford to support her too).)  I understand it's probably different with a parent wanting to help ("help") their child/children, but as I like to say, "it's not helping if it's not helpful."  This "loan" is not helpful to you/your FI and your financial situation/goals, and it's not helpful to continue financially enabling an adult child (they need to learn at some point).  As another PP said, maybe really think about if this is someone you want to be tied to.

[holly116]

This almost exact scenario is why my mom called off her engagement to her previous FI. He sold his home to his son and gifted him all the equity to help his son qualify for the mortgage, assuming he wouldn't need any of that in the future since my mom was going to take care of him.

To make it 100x worse, her FI was on the deed for a house he bought with my mom (but not on the mortgage, literally the dumbest decision my mom has ever made), and although he contributed only around 20% of the overall household expenses while they were together, he got HALF of the equity in mediation after they split. It was a goddamn disaster. The original plan was she sold her old house, he sold his, they both put all of the equity in the new one together. Except he didn't do that, saw nothing wrong with it and cut my mom out of the discussion about selling his old house to his son entirely, and expected her to just be fine with it. Joke's on him but it was an incredibly expensive mistake on my mom's part. He's now living in the basement of his old house, that his son owns. Mom will be fine in the end, although more bitter than ever.

He has every right to put his relationship with his son above his own future well being, but you get to decide if that's what you want to be connected to moving forward.

[livinitup]

He’s “totally confident” that he’ll get paid back and the entirety of his son’s financial needs will swing well and completely in his favor.

Okay.

[madringal]

I would be sure to talk through the scenarios of what happens if the son dies before dad. Does the wife get all the equity? I am assuming he isn't going to want his newly widowed DIL and his grandchildren homeless, but is he going to cover those payments too?

Personally, I would use a quick claim deed to add the son to the home, and then refi in just the sons name, taking out all the equity they want. No point in making this a purchase situation if they don't need too.

[ellipses84]

Since this thread got bumped and I recently saw a video on it, I think he should talk to an estate planner. I’m probably explaining this poorly but in the video case, the person said putting the house in a living trust and having the son inherit it would put him in a better financial position because he wouldn’t have to pay capital gains taxes if he were to sell it in the future. They may have been wanting to gift the whole house, but I think the same would apply if he were selling the house at a major discount.

[simpsongal]

Just adding to the naysayers...some of you may know we had a disaster of a co-signed mortgage situation in my family. That's not exactly what's going on here, thankfully, but it's getting close. I lectured my family until I was blue in the face about the scenario. The fact that you can't get approved for a loan to buy the value of the home you want essentially means you can't afford it.

The whole robbing Peter to pay Paul re the loans, and 3 kids at age 25 w/a Union job and frequent unemployment.... my dad had the same type of job. It's a recipe for setting yourselves up to bail his son out. Which might be fine if you're on board as a couple and you can afford it. Beware enabling bad decisions and people getting accustomed to certain luxuries w/o skin in the game or putting in the work.

I'm sorry you're there - I would recommend therapy even if just for yourself so you can decide how to manage these feelings (or whether you want to).