- I suppose you begin by finding the property you want to purchase and that you can afford.
Your parents purchase the house in their names and get a loan in their names. When you are ready to purchase the property, you and your parents agree on a purchase price and on the interest rate you will pay.
Now, your parents transfer title to the property to you, you make your mortgage payments each month to your parents, and, they in turn make their mortgage payment to their lender.
As far as you are concerned, when you purchase the property from your parents, you are just paying on a mortgage loan the same as you would if you had gotten a traditional loan from the bank. I don’t know of any state where a wrap is not legal.
The process begins with your parents. They purchase the house in their names and get the loan in their name. When you are ready to purchase the property, you and your parents agree on a purchase price and on the interest rate you will pay. Now, your parents transfer title to the property to you, and you make your mortgage payments each month to your parents and they in turn make their mortgage payment to their lender.
The title company you use to complete the settlement will have all the forms you need to create a wrap-around mortgage. Title transfer will be done by an all-inclusive trust deed or a warranty deed. The title company will figure this one out.
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If your parents sell the property to you for about what they paid for it, there will not be any tax consequences.
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When you and your girlfriend sell the home, you get the capital gains exclusion on a primary residence sale provided you each have owned AND occupied the home as your primary residence at least two of the five years prior to the sale.
You and your girlfriend are co-owners since you bought the property from your parents and they transferred title to you and your girlfriend. Any gain realized on the property is yours, not your parents, since you are the property owner and not them.
After all that, there are easier ways to accomplish the purchase and title transfer. The first is a purchase Subject To the existing loan. Your parents would still purchase the property and take out a mortgage loan. Then they transfer title to you and your girlfriend and the two of you just “take over” their mortgage loan. You make the mortgage payments instead of your parents. You still get all the tax benefits of home ownership and the capital gains exclusion (if you are eligibile) when the property is sold. No need to resort to a wrap. In effect, you are taking title to the property and assuming your parents mortgage without prior lender approval. This arrangement is protected under federal law and the lender can not exercise their Due On Sale Clause right to accelerate the mortgage as long as the loan stays current. Your parents still remain legally liable for the mortgage, so if you screw up it is your parent’s credit that gets burned.
The second approach would be for them to purchase the property and take out the mortgage loan as before. Now they sell you the property on a Contract for Deed. The IRS will treat a Contract for Deed as an installment sale, but, there won’t be a tax consequence if the sale price to you is no greater than what they paid in the first place. You can sell the property, refinance the property, and still get all the tax benefits of home ownership.
A talk with your parents, their attorney, their estate planner, and their financial planner is probably the best first step for all of you to take.