Multigenerational house mortgage options

OCHouse99

New member
My wife and I are considering some options to purchase a new home which contains the separate casita which my parents would occupy.  They are nearing retirement age, and we have carefully considered the social aspects of such an arrangement so I don't want to focus my topic to those questions, but would like to see if there are experiences from this forum around more the core financial aspects.  For background, our contribution to the arrangement as well as our goals are different but complimentary in many ways.  My parents have more equity to contribute, but would like to find ways to minimize their monthly expense.  We have some equity to contribute, but have the higher income to be able to carry the larger percentage of the note.  We are considering houses which would require a jumbo loan somewhere in the $800k - $900k range.  We collectively plan to put between $400k and $500k as down payment.  Here are my questions: 

1.  Is the only mortgage option to carry a jumbo loan with both families on a single note?  Or can a loan be packaged I such a way as to be separate conforming loans tied to the portion of the mortgage each family would take on?  I understand the lien had to be tied to both, but is this something which lenders could package? 

2.  My credit is stronger than my paerents due to some marks on their credit 5 years ago.  If we elected to not include them on the mortgage but did include them in the deed, could they contribute financially toward the down payment and mortgage without it being deemed a gift? 

3.  Are their certain types of trusts which we should look into creating which provide the proper protections?  In particular a clause which immediately passes title in the event of death of one of the parties outside of probate?

4.  If I wanted to speak with a professional on these types of questions, what type of professional service would these be best addressed by (trust attorney, financial / estate planner, etc)? 

Appreciate any thoughts / comments. 

 
The best financial method to achieve this is for you and your spouse to purchase the house in your names only, with a mortgage tied to you two only. Then your parents can use their wealth to pay rent. They'll like it 'cause they'll get to hold onto more cash (old folk love this), and if it doesn't work out for whatever reason, a clean break is clean and simple.
 
Plus do you have siblings?  Gets complicated if you do and the parents have some sort of ownership.
 
In response to # 1, the best way to achieve this is to create an LLC with the owners of the real estate identified and their respective interests, along with dissolution details. This works best with cash purchases in the circumstances you describe because the mortgage complicates everything.

You can have title-only owners and mortgage-only borrowers (why anyone would do this is beyond me, but people do). You want to talk to a knowledgeable broker/lender to learn your options. That's free.

I've seen this done before a few times, and it's almost always done primarily as a means for a couple to buy a nicer house than they could otherwise afford.
 
Because the llc will be a shell the banks will still require the borrower to be on the loan (not the llc)
 
Perspective said:
The best financial method to achieve this is for you and your spouse to purchase the house in your names only, with a mortgage tied to you two only. Then your parents can use their wealth to pay rent. They'll like it 'cause they'll get to hold onto more cash (old folk love this), and if it doesn't work out for whatever reason, a clean break is clean and simple.
I agree with this, unless they have a reason to want to be listed in order to bequeath to siblings, which doesn't make much sense as alluded to, it'll get messy

Easier if they set aside their own cash, and just rent out the casita, once both pass on, they should have a trust/will to split whatever they have left to whoever they choose
 
Thanks for quick comments.  We considered the rent option, but weren't sure about 2 aspects.  1- wouldn't the rent be considered taxable income?  2- how can you incorporate their funds as part of the down payment.  It's not an insignificant amount and way more than gift tax limits. 
 
As for 1, you cannot split the loan. It's tied to the single lot and all improvements. For example, you can get one mortgage loan, but a second loan for building a Casita/Pool/any improvement that is tied to the single lot, primary home, not a loan just on the portion of the primary lot the Casita/Pool/any improvement is on.

As for 2, any funds over and above your initial down payment must be considered either a gift, or a secured loan (401k loan, loan against property, loan against some kind of collateral). Any unsecured loan is not allowed, although gifts are. The reporting of the use of these funds to the IRS is up to you and your parents. Lenders simply are performing their own due dilligence by requiring the disclosure of these funds as either a gift or a secured loan.

My .02c
 
OCHouse99 said:
Thanks for quick comments.  We considered the rent option, but weren't sure about 2 aspects.  1- wouldn't the rent be considered taxable income?  2- how can you incorporate their funds as part of the down payment.  It's not an insignificant amount and way more than gift tax limits. 

The gift tax limit per year is about 14,000. so if some one gifts you more than 14K per year technically the giftor is supposed to file a gift tax return but no actual gift taxes are paid. it is just for the IRS to be able to keep track because they when you hit the limit of $5 million and change then you have to pay the estate tax. So even if they are gifting you 300K, no one is paying any taxes, just a tax return to let the IRS know.
 
qwerty said:
The gift tax limit per year is about 14,000. so if some one gifts you more than 14K per year technically the giftor is supposed to file a gift tax return but no actual gift taxes are paid. it is just for the IRS to be able to keep track because they when you hit the limit of $5 million and change then you have to pay the estate tax. So even if they are gifting you 300K, no one is paying any taxes, just a tax return to let the IRS know.

Link?
 
OCHouse99 said:
Thanks for quick comments.  We considered the rent option, but weren't sure about 2 aspects.  1- wouldn't the rent be considered taxable income?  2- how can you incorporate their funds as part of the down payment.  It's not an insignificant amount and way more than gift tax limits.

Those are two complicated tax questions that can be answered through many hours of research, and you're certain to miss something, or simply paying a tax professional for a couple hours of advice.

The rent from your parents would be "ordinary income" unless you or your wife are real estate professionals. However, you will be able to deduct expenses related to the casita from your income and likely depreciate the pro rata share of your house the casita represents. There are additional concerns because this isn't an "arms length" transaction due to family related tenants.

An estate tax professional could advise you on how the parents could avoid gift tax in this situation, if the parents have an estate of less than $10M. Certain forms have to be filed. Also, the parents' estate plan would presumably need to be adjusted to account for this gift so that other beneficiaries of the estate receive the intended "fair" share.
 
Perspective said:
The rent from your parents would be "ordinary income" unless you or your wife are real estate professionals. However, you will be able to deduct expenses related to the casita from your income and likely depreciate the pro rata share of your house the casita represents. There are additional concerns because this isn't an "arms length" transaction due to family related tenants.

It would be business income. As long as you don't rent out the casita for a profit (rent minus expenses) you will not owe any income tax on it. You just can't double dip (deduct property taxes or interest both from the rent and from your ordinary income).
 
paperboyNC said:
Perspective said:
The rent from your parents would be "ordinary income" unless you or your wife are real estate professionals. However, you will be able to deduct expenses related to the casita from your income and likely depreciate the pro rata share of your house the casita represents. There are additional concerns because this isn't an "arms length" transaction due to family related tenants.

It would be business income. As long as you don't rent out the casita for a profit (rent minus expenses) you will not owe any income tax on it. You just can't double dip (deduct property taxes or interest both from the rent and from your ordinary income).

you would want to allocate property taxes and interest to the casita otherwise you would probably have taxable income on the rental. though you probably end up in the same place.
 
put your and your wife's name on the mortgage note (if your combined DTI and credit qualify) and everyone's name on the deed.

Have your parents pay you rent in cash so you don't have to report to IRS and there is no paper trace.
 
The California Court Company said:
Have your parents pay you rent in cash so you don't have to report to IRS and there is no paper trace.

I think he's asking how to do it legally, not illegally.

Legal ways to have your parents pay rent so that it is not income include having them give you annual gifts and having them pay for other expenses directly (such as food).
 
The California Court Company said:
put your and your wife's name on the mortgage note (if your combined DTI and credit qualify) and everyone's name on the deed.

Have your parents pay you rent in cash so you don't have to report to IRS and there is no paper trace.

Ah, tax fraud advice. Ain't it lovely?
 
Fraauud, what is this fraaauud?
The parents can live there for free, and give the kids allowance money monthly
 
AW said:
Fraauud, what is this fraaauud?
The parents can live there for free, and give the kids allowance money monthly

Sure thing, and every dollar of that allowance is ordinary income and fully taxable without any associated deductions.
 
The parents can still give $14000 each to the husband and wife who own the home, which comes to $56000 per year without either having to declare it as income or even declare it.

AND they can give more tax free if they declare it on their tax forms as a gift and it gets deducted from their lifetime allotment for gifts.

But if they end up giving away everything and they need to go to a nursing home down the road and think they can get Med-I-cal to foot the bill, all the money given to the kids will be subject to the 5 year look back even though no one owed tax on it.
 
Back
Top