Can seller create their own loan?

[caslerst]

What is the name of your state? California

My mother-in-law owns her home free and clear and she wants to sell it to my wife and I. We would like to pay full price for the house so that if we sell in 30 years we avoid as much capital gains as possible, but we can't afford the house if we pay full price using a traditional loan.

If my mother-in-law finances us, can she design the loan any way she wants? Like a 30 year loan at 0% interest? Someone mentioned that's called a sweatheart loan and the IRS might charge her taxes on interest she should have received. What about 3% or 4%? Is she required by law to charge prime? At what % would the IRS call foul?

ThanksWhat is the name of your state?

 

[tranquility]

Since the "penalty" for a below-market loan (beyond gift aspects) is the statutory federal rate of interest, that's a starting point. How much lower you could go depends on the facts.

The current rates are at:
http://www.irs.gov/pub/irs-drop/rr-08-04.pdf

 

[caslerst]

How much lower you could go depends on the facts.

Can you elaborate on that for me? What kind of facts could affect what rate she could give us?

Thanks for the help.

 

[tranquility]

No, that's not the way it works. "Without the facts, there is no issue" is a law school aphorism. I am not going to write a thesis on what could be relevant. If the interest difference is very important to you you need to see a professional who can discuss your situation in detail and help you by using his professional judgment on if you can discount the loan without risk of imputed interest.