O.K. I need some advice here on how I could structure this deal. I currently live in a house that I rent from my Mother and Father in law. House is worth $330K-340K. I have been approved for a tradional loan for 325K 100%. Mom and Dad would like to take some money and invest in a duplex using a 1031. They would like to leave us with some money to do some updating. If they aggreed on paper to sell the house for $250K to us pay off their inital mortgage balance of 140K and then exchange the balance into their new investment. We casually talked about having a note paid after 10 years for an additional 40-50K payable to them. I would like to tap into the $ for updating on the house. We both want to avoid extra taxes and fee’s. So I’m stumped, Can I take the loan for 325K pay them and have them give me back Cash? Do I try to get a equity line? or is their another idea? Help
I’m amazed that nobody has chimmed in on this, I’m just looking for some creative ideas here, not for the answer on how to cure cancer ! If anyone could just share a few ideas how they would structure this, I would appreciate it.
For starters if your parents want to do a 1031 exchange they will need to buy a home of equal or greater value to avoid taxes. It is just a method to differ taxes owed on this sale.
Now if your parents want to give you money for upgrading, then thats between the 2 of you. You can do the loan for 300K, they get the 300K, pay off the mortgage and then just give you 50K or whatever it is. You can create a lien for 50K which your inlaws can file with the county against the home. I would check with a local attorney on how to file the lien (if you use a title co to do your closing ask them as they can draw up the paperwork for a fee). This lien will protect them from you selling the home without paying off the lien. Once a lien is recorded, it will always show when doing a search on the property so once it is paid, you then get it removed. Just keep a copy of all payments so you can prove it has been paid off.
Doiing a HELOC is tough now, especially if you have not owned the home for more than 12 months now.
Yrush200,
I have lived in this home for more than 12months, what if I drew up a lease option agreement with my parents consent and just have 12 months pro-rated. What I mean is the lease would show we had an agreement that I’ve always had the option to buy? I can prove that we paid on time every month by canceld check. Regardles I appreciate your response
You can make a L/O agreement if you have canceled checks. Many brokers do that and ask b/c it makes the loan easier at times. But your question was more in regards to getting money to redo the home. The L/O does not help there. Doing a L/O agreement, can help with the financing and if they want to give you a nice credit at closing b/c the agreement can say half the rent is a credit when you buy.
So now I am trying to figure out what you want to know?
Seems like you may be overthinking this. Just buy the house at $325K and put the difference minus your 50K into the 1031 exchange. Although depending on what they paid for the house that 50K may be taxed as income. Then you have them loan you the 50K on a 10 year amortized note. They can file a lien with the county clerk for the 50K and all is good. All you have to do to figure out the payment is go online and print off an amortization schedule. Although your in-laws will have to pay taxes on the interest they make on the 50K note. “Creating” a L/O document after the fact is not a good idea. If it was not used originally then you will have to put in fake dates and why get yourself or your in-laws involved in fraud. The other thing is you are gonna get murdered going with 100% loan of that size with MI. You might consider going with a lender paid MI product or have your in-laws gift you 5% towards down payment. This will help lower the MI significantly. Hope this helps.
Yrush2000 & Chris w,
Thanks for the advise, this helps a lot. Someone told me that I could structure this into a LLC and giving my parents a share equal to $50K. That way if I sold the house and purchased or 1031 exchanged a new home I would be able to also invest their shares into the new property giving them a better return with low to zero taxes? Your thoughts please.
I am not able to offer advice on the subject of LLC’s and taxes. You might post this question in the Asset Protection, Legal forum on this board. I can say this though. If you are buying the house for $325K and it is worth $325K then you are at 100% LTV. If you take out a loan secured by the property for $50K now your LTV has gone to over 115%. You will be upside down on this house. The $50K in upgrades MAY give you $50K in extra value, but you should be careful. But based on the numbers you provided I don’t think you need to worry about a 1031 exchange at this point becuase after you pay your closing costs and taxes on the house your not going to have much left over. Hope this helps.