My husband and I purchased a second home two years ago, for $160,000, with a 30-year mortgage at 2.5%. We bought it for the sole purpose of renting it out to our son and his new wife.
They were fresh out of university, just starting their careers. They have made this house their home. And it was a great arrangement as they covered all costs, maintained and improved the property.
But now, since they are making good money, they would like to have a house of their own. The four of us want to turn this lease agreement into a home ownership scenario.
Because of the 2.5% rate, none of us are interested in selling the house and raising our rates to 7%.
We’re thinking of keeping the mortgage in our name, playing bank, having our son pay all expenses, and have the house his own. That was the plan we had in mind, and it would be formalized in a written agreement.
““We are thinking instead of keeping the mortgage in our name, acting as a bank, having our son pay all the expenses and have the house his.”“
When he finally decides to sell, we’ll get back the down payment, expenses, and a little bit of equity. They will keep the rest.
Now the home is valued at around $50,000 at this point.
Here’s my question: Is this a bad idea? We know there must be tax implications and other pitfalls, but we just can’t seem to get it.
keep it in the family
“Big moveis a MarketWatch column that looks at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
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The plan makes sense to me. If your son regularly pays all the expenses for the house, including the insurance and the mortgage, while you work as a prop, I don’t expect any major issues.
“Anyone can help their parents or someone else make their mortgage payments,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch.
““A person can help his parents or anyone else make the mortgage payment.”“
But check if your mortgage is potential loan. If it’s a potential loan shark, Aaron Kovac, an Austin-based mortgage broker, told MarketWatch, that means your kid can buy your home by taking over your mortgage.
But, he added, most conventional mortgages cannot be assumed.
Also consider the tax implications. If your kid pays off your mortgage, it could count as a gift of up to $17,000 in 2022, according to Internal Revenue Service. And since a married couple can give double, after $34,000, he’ll have to pay taxes on the payments for that year.
But at the same time, there are drawbacks to your kid paying off your mortgage.
Although there is no prohibition on doing so, he will not receive credit for making payments. So he might want to look into that.
Plus, he also wouldn’t be able to enjoy the tax benefits of making the payments, Cohn noted. In other words, he won’t be able to claim the mortgage interest deduction on his tax return.
Finally, keep in mind that you will eventually be responsible for the mortgage in old age, regardless of your financial circumstances.
If you work as a banker, and your kid ends up not paying for some reason in the future, that’s your safety net, and you’ll need to pay off the rest of the loan.
Imagine you are in your 80s and this arrangement is on. If your son ends up in a situation where he can’t repay, you’re still on the hook because the loan is in your name.
And in that case, you will be expected to cover it, in your old age, no matter how big that monthly amount is.
So talk to him about how he plans to solve such a scenario when it comes up.
Overall, your plan seems logical, albeit with some flaws.
But as Cohn says, given how high rates are today, the benefit of missing out on a tax deduction versus maintaining a historically low mortgage rate is certainly clear.
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