Paying Gift Tax on Mortgage Balance Payoff

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My father wants to pay off the balance of my mortgage ($65,000) but we are concerned with paying gift tax on such a large amount. Is there any way to do this without paying the gift tax?


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Well first off, if your parents are still both alive and married, they are allowed to gift $13,000 each, so they can gift $26,000 to you and $26,000 (your dad gives $13,000 to you, and your husband, then your mom gives $13,000 to you and your husband).  That gets you to $52,000 dollars, and still $13,000 to go. The remaining $13,000 can be gifted, but THEY pay the tax on it not you.  You can arrange for the gift tax to be paid by yourself rather than your father if you wish. 

Also, see this article I am inserting in here.  It explains that any one person has a $1,000,000 exemption in their lifetime beyond the normal gift tax exemption.  So if your father is still under his $1,000,000 lifetime exemption he pays no tax on the extra $13,000.

http://finance.yahoo.com/taxes/article/104188/Know-the-Gift-Tax-Rules So basically the yearly gift tax rule makes you count anything over the stated amount, $13,000, toward your lifetime exemption.  Once an individual crosses that exemption they then pay taxes on that amount.  So as long as your dad has gifted less than $1,000,000 in his lifetime he can gift the whole amount to you, tax free.  Hope this answers your question!  But be sure if he has a spouse that each of them gift their max, just in case they gift more later in life!

So the answer to your question is, if your dad has gifted less than $1,000,000 in his lifetime, he can gift the $65,000 to you, and nobody pays taxes on it.

**Be sure though that they file a gift tax return!!!!!!!!!!!!!!!!!!!!

Answered over 4 years ago

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Before addressing this question, it should be noted that the IRS may reflect this Q&A as tax evasion.  Tax avoidance is fine – but tax evasion is another story altogether.  Be sure to consult with a tax attorney or similarly qualified tax professional before following any suggestions offered here.

The first suggestion is for your father to purchase of the promissory note (mortgage loan) from your existing lender/servicer.  The change of ownership of the mortgage is documented with an assignment of the mortgage or deed of trust (depending on where you live).  Once your father owns the mortgage loan, the two of you, as the creditor and the debtor, are free to renegotiate the repayment terms.  Just remember that any renegotiation of the repayment terms could affect his tax liabilities and yours.  It would be prudent to consult with a tax attorney or CPA to schedule annual gifts in the form of principal reductions (or debt forgiveness).  Special rules do apply here – this is not something you’ll want to tackle without professional assistance.

Second, if the institution that owns and/or services your mortgage is not interested in selling the loan to your father, you can certainly arrange for your father to refinance your existing mortgage loan, and thus becoming your new lender.  Once achieved, you would have the ability to set up scheduled repayments in conjunction with any gifts he is allowed to make without creating tax liability.  In some cases, if set up properly, deferred repayment of the debt may be postponed indefinitely.  Again, there may be tax ramifications so consulting with a professional on the details is important – someone once said the devil is in the details.

Last but not least, you could sell your home to your father who then pays cash for the purchase, and through changing title by closing the sale/purchase, pays off your existing mortgage loan.  Once he owns the property, he should be able to gift it back to you without incurring tax liability.  This will depend on several factors, including, but not limited to, state and local real property laws, real property transfer tax laws, reassessment of real estate taxes, and inter-family transfers/gifts of real property.  If there are issues with state/local laws that would prevent you from achieving successful tax avoidance through this method, he could retain ownership of the property allowing you to remain in the home.

If this last route ends up being the best one for you, there are additional alternatives or steps that can be taken to provide equitable protections from other heirs to your father’s estate.  The use of an irrevocable trust, specific to your property, could be utilized.  If your father already has a trust, he would could simply transfer title to the trust, either through the purchase transaction or later on.  Setting up additional provisions within the trust would grant you additional protections from any claims other heirs could bring forward.  Also, to prevent any challenges on the legitimacy of the transfer, obtaining continuing title insurance could close any challenging loopholes.

If your state does not have laws that allow a trust vehicle to hold real property in perpetuity and separate from your father’s estate (probate estate), then a life estate may be granted with the remainder (after your father’s passing) being transferred directly to you through the trust estate.

Answered over 4 years ago
Tony Rand
52 2

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Yes there is. There is an exclusion of tax for up to $1,000,000 in gift(s). Gifts of up to $13,000 per person per year are excluded as gifts and are not required to be reported. Amounts above this are excluded from tax up to $1,000,000 per lifetime per donor. Reporting gifts above $13,000 is required so that the IRS has a record of the amount of gifts that an individual gives. The reason for gift tax is to keep individuals from gifting away their estate in an effort to lower the value of the estate to below that which is excluded from taxation, thereby allowing their heirs from having to pay estate tax. If a donor takes the exclusion and elects not to pay gift tax with the “unified credit,” the amount excluded from gift tax is deducted from the estate tax exclusion/credit.

As you can see this is a complicated tax law. The IRS recommends that you get tax advice when dealing with gift and estate tax issues:  "The laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code. For further guidance, we strongly recommend that you visit with an estate tax practitioner (Attorney or CPA) who has considerable experience in this field."

Here is a link to the IRS FAQ on gift and estate tax and IRS Publication 950 Introduction to Estate and Gift Taxes:

http://www.irs.gov/businesses/small/article/0,,id=108139,00.html http://www.irs.gov/publications/p950/index.html  

Answered over 4 years ago
Harlan Cooper
679 3

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