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hello all - I could use some guidance on this. My FIL is offering to payoff our mortgage with mattress money. Yes, he's earned the money and paid his taxes on it.. he just doesn't want to invest it with the bank anymore, He's invested in antique cars and gold bars etc. He figures, we'd get the money anyway as inheritance and he might as well help us now.
We have $68K left on the mortgage. Its fixed, 30 year at 5%. We purchased the house in 2011, so 28 years left on it. I know we won't get the tax break for mortgage interest anymore but what other tax concerns should I be aware of? I assume we'll have to report it as income, right? Or a gift tax?
I really appreciate any insight that can be offered. Its very nice of him to think of us this way, but I want to make sure we have a strategy to do it right for us. Thank you.
My FIL is offering to payoff our mortgage
$68K fixed, 30 year at 5%. 28 years left on it.
That would be a very small mortgage for most.
Are you having difficulty keeping up with it now?
What would you do with the +/- $400 per month otherwise?
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I really appreciate any insight that can be offered.
Do you have other debts? Other practical assets like reliable car?
What about the level of education/training... is there a practical route to improve that?
No trouble keeping up with it. I realize its a small mortgage for most - we live in a very inexpensive part of MI. We so have some credit card debt ($4000) that we'll be able to pay off quickly, then save the rest. Our cc is usually around $500 a month, but we recently bought a computer (for me, for grad school) and did some house upgrades. We do each have a 401K we contribute to and we can increase that drastically if we want. We do have a car that is paid off as well. I do have a small unsubsidized loan for grad school too.
I think the line of thinking is, that when we want to sell this house (in 2+ years when the market improves a bit around here) we'll be able to have all the $ from sale as a down payment for a new place.
Is this a good strategy? Won't we have to prove where we got money from to pay the lump sum? Would we have to declare it as income? or a gift? Would we get hit with taxes this year? (that amount would be doubling our income!)
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Any transaction of $10,000 or more is subject to IRS scrutiny, and is reported to them by the banks. If I recall correctly there is an annual exclusion of $14,000 and the gift tax is the responsibility of the giver. The tax rules are (as always) fairly complicated, and in your case it might be a good idea to hire a tax attorney
or other expert for advice.
Hemlock is correct -- gift taxes would kick in and would anti-money laundering requirements. It might make more sense to chunk out the payments over five years or so to avoid the taxes and split each year's transactions into two or more events seperated by three or more months to avoid the AML requirements, I'd think somebody putting their money into physical assets probably has all kinds of paranoid theories...
the line of thinking is, that when we want to sell this house (in 2+ years...
Is this a good strategy?
Not especially; and not even if the plan was to keep the home for 20 years.
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Won't we have to prove where we got money from...
Would we have to declare it as income? or a gift?
FIL and MIL can each give to each of you an annual tax free gift of $14,000
That's (14K x 2givers x 2receivers) $56,000 of tax exempt gifting PER year.
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some credit card debt ($4000)
a small unsubsidized loan for grad school too.
each have a 401K we contribute to...
That's a much better use of the money.
Zero the CC debt and zero the student loan(s).
Fill the 401K (and some IRA's) to the max for 2013 and then again early in 2014 too.
Establish then fill up an "emergency fund".
Spend the gifts wisely. The mortgage is the last thing to use it on.
mkatco - not a tax attorney - a CPA is who you need to speak with.
And as an ex-accountant, I'd agree with Mr. Rational's advice. He's right on the money. Get rid of the car and CC debt, then invest the money in your future retirement instead of paying off the mortgage.
Like the others said
Pay off your debt CC and student loan. DONT use the CC anymore. Allocate the funds to whatever you want to purchase and buy cash. Put some away and pay extra every month to the principal. I'm a firm believer in debt free living
There is no gift tax for the person receiving the gift nor is it counted as income. So, the OP would have no tax implications at all. Your FIL may have to fill out a gift return if he gifts more than $28k. As posted above, your MIL & FIL can each gift $14k each to you and your spouse in 1 year, so $56k. Even if your FIL goes over the $56k, it doesn't necessarily mean he is going to get hit with gift tax. A person has a life time gift of like $5mil. So he can gift $100k right now with no tax, but it would come off his lifetime tax free gifting amount.
I am not an accountant, but this is how I understand it.
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