"Buying" a house, but F-I-L is paying for it all - Legal/Ethical/Tax implications

[matt_sandiego]

"Buying" a house, but F-I-L is paying for it all - Legal/Ethical/Tax implications

What is the name of your state (only U.S. law)?
I live in California, but the house is in Illinois.


First off, thanks to anyone who can offer advice and chooses to do so - I greatly appreciate it!

My father-in-law owns a subdivision with two other partners. Their only remaining asset is a single family home which is currently for sale. My FIL wants my wife to "buy" the house in her name, however he plans on paying for it entirely. He will put about 40% down, and pay the mortgage and property taxes every month.

I have several questions about this:

- Is it legal for my wife to buy a house with none of her own money? Can he actually write the check for down payment and cover the mortgage every week?

- What are the tax implications of this? When we get sent the property tax bill at the end of the year, is it illegal for him to pay it? How would we handle the interest write off when tax time comes?

- I believe he is doing it in her name because of a conflict of interest or something similar with him buying a house from a LLC that he is a partner of. If the LLC was sued, could the search for assets lead to "our" house?

What I would like to do is just take on the mortgage ourselves, and owe him the 40% down payment - but I believe he is doing this transaction for his own investment so I don't think he would agree to this.

I appreciate your responses!

Thanks!!!

 

[FlyingRon]

- Is it legal for my wife to buy a house with none of her own money? Can he actually write the check for down payment and cover the mortgage every week?

Can daddy pay babiy's bills? Sure. He is subject to gift tax reporting if it exceeds $12K in any one year but there is a million dollar life time exclusion on him paying the gift tax.
Note that if the property is in her name and so is the mortgage, if something happens to dad that he is unable or disinclined to continue to make these gifts, she is still 100% resposnible for them.

- What are the tax implications of this? When we get sent the property tax bill at the end of the year, is it illegal for him to pay it? How would we handle the interest write off when tax time comes?

He can pay it. He can't deduct the tax or the mortgage as he is not obligated to pay them.

- I believe he is doing it in her name because of a conflict of interest or something similar with him buying a house from a LLC that he is a partner of. If the LLC was sued, could the search for assets lead to "our" house?

There still may be a conflict of interest. If the partners in the LLC realize that he's giving a sweet deal to a relative (whether the relative is paying for it or accepting it as a gift), they may still sue.

Further if he's really attempting to assert ownership interest in the house (i.e., if you were to sell it, he'd want the money), he's liable to fraud and tax evasion charges if that is really what is going on. If you knowingly are participating in this, you're liable for criminal and civil sanctions as well.

 

[HuAi]

Also, your wife will have a tough time getting a mortgage in her name if the downpayment is not coming out of her bank account.

 

[matt_sandiego]

Also, your wife will have a tough time getting a mortgage in her name if the downpayment is not coming out of her bank account.

Apparently he's done business with the bank for many years and this is not an issue.

 

[matt_sandiego]

Can daddy pay babiy's bills? Sure. He is subject to gift tax reporting if it exceeds $12K in any one year but there is a million dollar life time exclusion on him paying the gift tax.
Note that if the property is in her name and so is the mortgage, if something happens to dad that he is unable or disinclined to continue to make these gifts, she is still 100% resposnible for them.

He can pay it. He can't deduct the tax or the mortgage as he is not obligated to pay them.

So if he is making the mortgage/property tax payments, can WE deduct them as we are the ones "obligated" to pay them?

 

[seniorjudge]

Apparently he's done business with the bank for many years and this is not an issue.

Yes, it is a problem.

The bank must answer to regulators, not your pa.

 

[seniorjudge]

So if he is making the mortgage/property tax payments, can WE deduct them as we are the ones "obligated" to pay them?

Good question.

Now, ask a tax professional (preferably a tax CPA).

I don't know the answer but I do know that there is some dispute about this.

 

[matt_sandiego]

There still may be a conflict of interest. If the partners in the LLC realize that he's giving a sweet deal to a relative (whether the relative is paying for it or accepting it as a fit), they may still sue.

Further if he's really attempting to assert ownership interest in the house (i.e., if you were to sell it, he'd want the money), he's liable to fraud and tax evasion charges if that is really what is going on. If you knowingly are participating in this, you're liable for criminal and civil sanctions as well.

I don't think that the partners of the LLC would have an issue with it, as they have apparently agreed on a sale price. Also, the potential lawsuit would come from outside the partnership (a third party) - not from one of the partners.

I believe he may be attempting to assert ownership in the house, based on your example "(i.e., if you were to sell it, he'd want the money)". At the very least, he would retain 40% equity in our eyes based on the amount of his down payment. How would this be tax evasion or fraud though?


Once again, thank you all fro your responses as this is a big decision for us.

 

[matt_sandiego]

Yes, it is a problem.

The bank must answer to regulators, not your pa.

There is a strong possibility that the down payment would come out of out account because of the gift.

 

[Zigner]

This reeks of fraud. I would suggest you politely turn down the offer.

 

[seniorjudge]

There is a strong possibility that the down payment would come out of out account because of the gift.

What HuAI said:

Also, your wife will have a tough time getting a mortgage in her name if the downpayment is not coming out of her bank account.

means is that the bank will want to know the SOURCE of the funds. This could be a problem for you.

 

[matt_sandiego]

This reeks of fraud. I would suggest you politely turn down the offer.

I had serious doubts myself. I am considering a counter offer which would go like this:

- He provides the down payment as a gift
- His only further involvement is helping with the managing of the property (finding a management company, helping find renters, etc.)
- We pay the mortgage every month along with prop tax escrow

Then, we simply owe him the 140K or give him a 40% equity in the house (can I do this as Tenants in Common or Joint Tenancy?)

 

[seniorjudge]

I had serious doubts myself. I am considering a counter offer which would go like this:

- He provides the down payment as a gift
- His only further involvement is helping with the managing of the property (finding a management company, helping find renters, etc.)
- We pay the mortgage every month along with prop tax escrow

Then, we simply owe him the 140K or give him a 40% equity in the house (can I do this as Tenants in Common or Joint Tenancy?)

Then make sure you get everything in writing prepared by your lawyer (not his).

Also, if he's on the title, then he will have to be on the mortgage.

 

[matt_sandiego]

Then make sure you get everything in writing prepared by your lawyer (not his).

Also, if he's on the title, then he will have to be on the mortgage.

Ok, then I think we are back my "square one question" - Why doesn't he just buy the house himself?

I imagine that if he didn't want to have his name as the sole owner, he wouldn't want his name on the title or mortgage. Sigh.

 

[seniorjudge]

Ok, then I think we are back my "square one question" - Why doesn't he just buy the house himself?

I imagine that if he didn't want to have his name as the sole owner, he wouldn't want his name on the title or mortgage. Sigh.

I (along with the Zig) smell a rat here...and y'all are the bait.