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.

This bargain sale approach is really interesting! I hadn't considered this option at all. A couple of questions - would the $100,000 gift still count against our lifetime exemption even though it's structured as a sale? And what happens if the house appraises for more than $325,000 when we're ready to do this - would we need to adjust the "sale price" to maintain the same gift amount, or could we stick with the original plan? Also, from a practical standpoint, would this affect his ability to get a traditional mortgage? I'm wondering if lenders have any issues with these types of family transactions or if they treat it just like any other home purchase.

Yes, the $100,000 gift portion would still count against your lifetime exemption, but that's actually not necessarily a bad thing since the current exemption is so high ($12.92 million per person). You'd file Form 709 to report it. Regarding appraisal - you'd want to get the house appraised at the time of your "sale" to your son to establish fair market value. If it appraises higher than expected, you have flexibility in how to structure it. You could adjust the sale price upward to reduce the gift amount, or keep your original plan if you're comfortable with a larger gift. For mortgage qualification, lenders are generally fine with these transactions as long as everything is properly documented. Your son would need a gift letter from you explaining the $100,000 difference, and the lender will want to see that you actually purchased the property first. Some lenders are more experienced with family transactions than others, so it might be worth shopping around or working with a mortgage broker who has handled similar situations. The key advantage of this approach is simplicity - one transaction, clear documentation, and then everyone moves on with normal homeownership and tax situations. Much cleaner than managing an ongoing family loan for years.

This is really helpful advice about getting everything documented upfront! The point about other children is something I hadn't fully considered - we do have two other kids who are younger, and I can see how this could create expectations or resentment down the road if we're not careful about how we handle things. The refinancing situation you mentioned is particularly concerning. What exactly made that complicated in your case? I'm wondering if we should build in specific terms about early payoff or refinancing from the beginning, or if that's something that's hard to anticipate. Also, regarding repairs and maintenance - did you find it better to keep those responsibilities with the person whose name is on the deed, or did you split them somehow? We were assuming our son would handle everything since he'd be living there, but I'm realizing the legal ownership might complicate that if something major comes up.

The refinancing complication in our case was that we had to figure out how to properly "discharge" our family mortgage when the bank wanted a clear title for his new loan. We ended up needing a lawyer to draft a formal satisfaction of mortgage document, and there were some title insurance complications because our original loan wasn't recorded through the normal mortgage system. For repairs and maintenance, we learned the hard way that it's better to clearly define these responsibilities upfront. We assumed our daughter would handle everything, but when the HVAC system died ($8,000 replacement), it became a whole discussion about whether that was her responsibility or ours since we technically owned the house. We ended up splitting major repairs over $2,000, but it caused some family tension that could have been avoided with clearer agreements. My suggestion would be to include specific language about early payoff procedures, refinancing processes, and repair responsibilities in whatever loan agreement you create. Also consider what happens if he wants to make improvements to the property - who pays, who benefits if the value increases, etc. These scenarios seem unlikely when you're starting out, but they come up more often than you'd think. The other children issue is tricky. We addressed it by being transparent with everyone about what we were doing and discussing whether we'd offer similar help to the others when they're ready to buy homes. It's not perfect, but open communication helped avoid some potential resentment.

Great point about state-specific considerations! I'm in California and completely forgot about our property transfer taxes when we were planning this. The documentary transfer tax here can add up, especially on higher-value properties. Your suggestion about a separate business checking account is brilliant - we ended up mixing family loan payments with our regular accounts and it made tax time a nightmare trying to track everything properly. Having that clean paper trail would have saved us hours of reconciling records. The foreclosure law research is something I hadn't considered but makes total sense. Even though you never expect to need it with family, having that legal framework understood upfront protects everyone involved. Better to know your options than discover them during a crisis. One question about title insurance - did you encounter any specific issues getting coverage for family transactions? I'm wondering if certain title companies specialize in these arrangements or if it's pretty standard across the board.

The loan servicing company idea is fantastic - I never would have thought of that! Having a third party handle the administrative side would definitely make things more professional and remove any potential awkwardness around payment collection. Do you mind sharing which company you used, or any recommendations for finding reputable loan servicers that work with family arrangements? The formal appraisal point is really important too. I can see how having that professional documentation would be crucial if the IRS ever questions the transaction. Better to spend a few hundred dollars upfront on an appraisal than deal with valuation disputes later. Your mention of homeowner's insurance restrictions is something I definitely need to look into. I hadn't considered that our insurance company might treat this differently than a typical owner-occupied property. That could be a significant unexpected cost if we have to switch to a different type of policy. Thanks for sharing your real-world experience - it's incredibly helpful to hear from someone who actually went through this process successfully!

This estate planning perspective is really eye-opening! I hadn't thought about how keeping the property in our name could affect our overall estate planning. We're not wealthy by any means, but with property values rising like they have been, I can see how this could become a bigger issue down the road. The step-up in basis point is particularly interesting - so if my son eventually inherits the property rather than us gifting it now, he'd avoid capital gains taxes on all the appreciation that happened during our ownership? That could be substantial over time. This makes me wonder if we should be thinking about this decision in the context of our overall estate plan rather than just the immediate tax implications. We don't currently have an estate planning attorney, but it sounds like this might be a good reason to find one. Do you have suggestions for what type of attorney to look for, or specific questions we should be asking when we consult with professionals about this arrangement? It's becoming clear that this is more complex than we initially thought, but all this advice is helping us understand what we need to consider before moving forward.