Mother Selling House to Son- Seller Finance
I originally posted this in estate planning sub but did not get much response. I thought someone here may have some input.
Mother Wishes to sell house to son through seller financing.
My mother owns her house outright and wishes to sell it to my brother. They would like to do seller financing where my mother charges the lowest interest rate acceptable by the IRS and he satisfies the debt within 5 years. She is reluctant to do so because she fears that the income received in interest will cause her personal income to go above the threshold that allows her to receive healthcare. She works , but does not receive a high income and will not be entitled to social security for a couple years. Does anyone know how they can make this transaction happen without the use of a bank or her having increased income due to interest?
Posted Jul 31, 2022, 3:21 PM UTC
Ok.
Even though there are a fair number of people on the sub, myself included, who have completed multiple transactions of the kind that you are looking to engage in our experience is largely irrelevant.
If we say, you need to write a Purchase Contract, a Note, a Mortgage (or Deed of Trust) plus cover multiple details I do not believe that is something you should consider attempting on your own.
What you are looking to do is covered under IRS Publication 537 - Installment Sales.
I would encourage you to engage a competent attorney and possibly CPA as well as you have concerns about taxes.
Question: WHY does your Mother want to sell the house?
Question: Is this a personal residence or investment property?
The interest rate is largely irrelevant. There are people who will scream "imputed interest" but I have yet to meet one person who brings that up as a point yet is aware of the exceptions to imputed interest. If you want to be safe ask several financial institutions what type of rate your brother would receive if he borrowed from them and use that or reduce it a bit.
Depending on if this is your Mother's Personal House vs an Investment property would typically have a great influence on the solution. There is so much information that we are not privy to.
Quick and dirty answers:
Answer: No, you do not require a bank for this.
Answer: The interest/tax/income question is highly personal and there are solutions but you do not have the required specificities to begin answering.
Please hire a competent legal and tax professional to assist you (simply because someone has a degree does not mean that they know what they are doing so look for individuals who can prove that they have experience in successfully guiding this type of transaction for many years).
IRS Code Section 1274 correctly supplied by u/SRD_Grafter.
It is her personal home, she is downsizing. The gains on the property will be tax free, but the interest income from carrying the note presents an issue.
How expensive of a home are we discussing?
Review the exceptions to imputed interest...the exact code section escapes me at the moment.
Your Mother may very well be able to sell the home on principal only payments.
If she wants to collect interest but not in the present she may be able to via a negative-am agreement.
Once again...I have seen otherwise competent professionals be unfamiliar with this particular structure although the better of them will understand how to apply once they review it. When I remember the appropriate code section I will edit it in later.
Once again I encourage the hiring of both competent legal and tax counsel for what you are seeking to achieve.
I want to say it's irc 1274.
You are correct good sir!
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