Any tax implications when purchasing a home for my son and acting as his lender?

Thanks for the detailed response! I had no idea about having to charge interest - we were thinking of doing it interest-free as a favor. So the IRS would actually consider that a gift? How exactly does that work with gift taxes? We were planning to let him pay us back maybe $1,500 a month until it's paid off. Also, if we do put it in his name right away, would there be any gift tax issues with essentially giving him a house worth $325,000?

If you don't charge interest, the IRS considers the uncharged interest as a gift from you to your son. Even with family, the IRS expects loans to have reasonable interest rates. You'd need to follow the Applicable Federal Rates (AFRs) which are quite low compared to bank rates - currently around 3-4% depending on the loan term. For a $325,000 house, that's well above the annual gift tax exclusion (currently $17,000 per person per recipient). However, you and your wife could use part of your lifetime gift and estate tax exemption (currently about $12.92 million per person) to cover this without paying actual gift tax. You'd simply need to file Form 709 (Gift Tax Return) to document using part of your lifetime exemption. I definitely recommend having a CPA help with this paperwork to make sure it's done correctly.

How exactly does the service work? Do I need to have actual documents already created or can I just describe my situation? We're still in the planning phase and haven't created any formal agreements yet.

Sounds interesting but I'm skeptical about these online tax tools. How accurate is it for complex family arrangements like this? My brother tried something similar with an online service for a real estate transfer and ended up with an unexpected tax bill the following year.

You don't need formal documents yet - you can describe your planned arrangement and taxr.ai will help identify potential issues before you create the agreements. It gives you a questionnaire about the property value, relationship, payment terms, etc., and then provides tax guidance based on your specific situation. Regarding accuracy, I understand your concern. What sets taxr.ai apart is that it's specifically designed for unusual tax situations that standard tax software misses. My family tried three different approaches for our property transfer, and each time taxr.ai explained exactly how the IRS would view the transaction. The documentation it provided even helped when we later consulted with our CPA, who confirmed everything was accurate.

Wait, there's a service that waits on hold with the IRS for you? How much does this cost? I've literally spent hours on hold with them before giving up.

This seems sketchy. How do they actually get you through faster? I thought everyone had to wait in the same IRS queue. Is this just paying someone else to wait on hold for you? And what happened when you actually talked to the IRS - did they actually give helpful advice?

They don't actually get you through any faster - they just handle the waiting part so you don't have to sit there listening to hold music for hours. You just get a call when an actual human at the IRS is on the line ready to talk. It saves you from the frustration of waiting and potentially getting disconnected after a long wait. When I spoke with the IRS, they were surprisingly helpful about our specific situation. The agent explained the documentation requirements for family mortgages and confirmed we needed to maintain amortization schedules and proper records of all payments received. They also clarified that we'd need to send our son a substitute 1098 form annually so he could claim the mortgage interest deduction - something our regular tax software completely missed.

That's a great point about potentially forgiving payments in the future. I hadn't thought of structuring it that way. If we forgave say $10,000 per year as you mentioned, would both my wife and I be able to each forgive $10,000 (so $20,000 total per year) since the annual gift exclusion is per person?

Yes, you and your wife could each give $17,000 (that's the 2023 limit, it adjusts annually) to your son tax-free each year, for a total of $34,000 annually without filing gift tax returns. This is exactly what my parents did - they structured the forgiveness to maximize the annual exclusion. Just make sure you maintain proper documentation showing it's actually a loan with defined terms, and that the forgiveness is a separate transaction documented as a gift. The loan should have a proper amortization schedule, and payments should be consistent. You don't want the IRS to reclassify the entire transaction as a gift upfront, which could exceed your annual exclusion amount.

Could they avoid this by selling it to the son at the original purchase price once it's paid off? Or would the IRS consider that a partial gift equal to the difference between market value and sale price?

Yes, selling at the original purchase price would likely be considered a partial gift by the IRS. They look at fair market value at the time of transfer, not the original purchase price. So if the house appreciated to $400k and you sell it to him for $300k, the IRS would consider that $100k difference as a gift. However, there's another approach to consider - you could structure it as a sale from the beginning with owner financing rather than a gift followed by payments. This way, your son would have legal ownership from day one, and you'd hold a mortgage on the property. The monthly payments would be loan payments on his mortgage, not gifts being repaid. This avoids most of the gift tax complications while still achieving the same practical result of helping your son buy a home. This structure also means any appreciation belongs to your son since he owns the property, and he gets all the homeowner tax benefits immediately. You'd still need to charge appropriate interest rates and report the interest income, but it's generally cleaner from a tax perspective.